Exchange Rate Regimes and Trade in the Western Balkans

Sammanfattning: The choice of exchange rate regime is believed to affect countries’ trade levels. Currency unions and currency pegs reduce exchange rate volatility and create greater price transparency in foreign trade compared to a flexible exchange rate regime. This paper analyzes the interplay between the choice of exchange rate regime and export levels by looking at the Western Balkans. A region with considerable variation in countries’ exchange rate policies. Western Balkan countries share a contentious history and the prospect of becoming EU members, enabling a focus on the effects of the exchange rate regime on exports to the Eurozone. The relationship between exchange rate regimes and exports is empirically estimated through a gravity model of trade using panel data for the six Western Balkan countries’ exports to the early Eurozone members. The results of the study indicate a statistically significant positive association between the euro-peg currency regime and Western Balkan exports to the Eurozone. Conversely, results for the unilateral adoption of the euro indicate the exchange rate regime to be negatively associated with exports for Western Balkan countries.