Exchange rate regimes and trade

A 'new version' of the gravity model is used to estimate the effect of a full range of de facto exchange rate regimes on bilateral trade. The results indicate that, while participation in a common currency union is typically strongly 'pro-trade', other exchange rate regimes which lower the exchange rate uncertainty and transactions costs associated with international trade are significantly more pro-trade than the default regime of a 'double float'. They suggest that the direct and indirect trade-creating effects of these regimes on uncertainty and transactions costs tend to outweigh the trade-diverting substitution effects. Tariff-equivalent monetary barriers associated with each exchange rate regime are also calculated. © 2007 Blackwell Publishing Ltd and The University of Manchester.