Finally, we re-estimate the effect of exchange rate regimes on business cycle synchronization by excluding observations whenever at least one country in a country pair belonged to either:
(1) oil-exporting countries with a membership in the Organization of the Petroleum Exporting Countries (OPEC); (2) countries with a population of less than 1 million; (3) tax havens as
Table 9: Exclusion of the selected country groups from the sample
(1) (2) (3) (4)
Excluded Excluded Excluded Excluded OPEC Small Countries Tax Heavens Latin America Regime 1 (NSLT / Currency union) 0.126∗∗∗ 0.108∗∗∗ 0.117∗∗∗ 0.113∗∗∗
(6.901) (6.032) (6.798) (6.669)
Regime 2 (Currency board) 0.001 0.006 0.016 0.015
(0.055) (0.214) (0.657) (0.740)
Regime 3 (De facto peg) 0.075∗∗∗ 0.083∗∗∗ 0.062∗∗∗ 0.060∗∗∗
(3.190) (3.278) (2.636) (3.095)
Regime 4 (Crawling peg) 0.025∗ 0.003 0.011 0.011
(1.680) (0.218) (0.798) (0.832)
Regime 5 (Crawling band) -0.017∗ -0.002 0.005 0.017∗
(-1.708) (-0.174) (0.572) (1.753)
Regime 6 (Moving band) 0.038∗∗∗ 0.015 0.021∗∗ 0.031∗∗∗
(3.790) (1.558) (2.239) (3.064)
N 22038 22744 24442 23301
R2 0.50 0.49 0.48 0.48
t statistics in parentheses; ∗ p <0.1,∗∗ p <0.05, ∗ p <0.01. Standard errors clustered at country-pair level. Country i and country j fixed effects included but not reported. Other explanatory variables from vector Xijt,robust included but not reported. Note: Yearly data is used for this table.
classified by the OECD and (4) Latin America countries. We exclude these groups due to their country-specific characteristics that might potentially bias our results. For example, countries in Latin America are excluded as those have been subject to multiple economic or financial crises in recent history. It can be seen from Table 9 that our results remain very robust to our benchmark and do not appear to be driven by any particular country group. Lastly, we confirm that our results are not driven by any specific time period22 or by the de-jure versus de-facto dichotomy in regimes classification.23
6 Conclusion
The use of a new dataset on bilateral exchange rate regimes allows us to move beyond the special case of currency unions and test the effect of various exchange rate regimes on busi-ness cycle synchronization. We find that currency unions increase the co-movement of busibusi-ness cycles, which is consistent with the previous literature. The point estimate from our analy-sis measuring business cycle correlation indicates that – compared to pairs with free floating regimes – countries with no separate legal tenders have more synchronised business cycles by around 0.12 points. This effect is particularly strong for countries within a currency union, as compared to countries with foreign currency as their sole legal tender.
The effect of other exchange rate regimes has not been previously tested empirically. We find that country pairs with other less flexible regimes have more synchronised business cycles. The effect remains positive and significant for both currency boards as well as de-facto pegs. The effect is much stronger for countries with high financial openness. In particular, currency boards are found to lead to more synchronised business cycles only for financially opened countries.
The effect of soft pegs is more heterogeneous - with the coefficient not always linearly decreasing with the increasing exchange rate flexibility - such that we must be careful in differentiating between the effects of individual soft pegs. Overall, we find no exchange rate regimes withless synchronised business cycles than free floats, at least as long as countries do not experience a severe financial crisis.
22See Table B5 in Appendix B for split according to periods.
23See Table B6 in Appendix B for a comparison of coefficients.
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