Title: Terms of trade and exchange rate regimes in developing countries
Description: "Since Friedman (1953), an advantage often attributed to flexible exchange rate regimes over fixed regimes is their ability to insulate more effectively the economy against real shocks.  I use a post-Bretton Woods sample (1973-96) of seventy-five developing countries to assess whether the responses of real GDP, real exchange rates, and prices to terms-of-trade shocks differ systematically across exchange rate regimes.  I find that responses are significantly different across regimes in a way that supports Friedman's hypothesis.  In response to a negative terms-of-trade shock, countries with fixed regimes experience large and significant declines in real GDP, and the real exchange rate depreciates slowly and by means of a fall in prices.  Countries with more flexible regimes, by contrast, tend to have small real GDP losses and immediate large real depreciations.  The contributions of terms-of-trade disturbances to the actual fluctuation of real GDP, real exchange rates, and prices are also examined"--Federal Reserve Bank of New York web site.
Subjects: Foreign exchange rates, Terms of trade
Places: Developing countries