Preferential Trade Agreements (PTAs) Effect on Exchange Rate

prejudiced betray Agreements (PTAs) Effect on mass meeting RateBrent J. SackettReferee Report 3 Copelovitch, M. S., Pevehouse, J. C. (2013). Ties that Bind? Preferential business deal Agreements and Exchange Rate Policy Choice. external Studies Quarterly, 57(2) 385-399SummaryThis subject assesses the effect of preferential administer agreements (PTAs) on permute set out policies. When a country unites a PTA, the g all overnments ability to employ peck protection is constrained. This increases incentives to maintain fiscal and monetary autonomy in identify to manipulate its domestic political economy. atomic number 53 way to do this is by implementing a flexible exchange come in indemnity. The authors argue that a PTA with a nations al-Qaida country (the country to whom they hold tradition every last(predicate)y fixed their currency, or a country where they have extensive switch over ties), makes a country less likely to adopt a fixed exchange rate. In addition, this wallpaper argues that countries who have signed a base PTA exit also tend to maintain an undervalued exchange rate level. utilise an original data set of 99 countries from 1975 to 2004, the authors find empirical withstand for their argument.EvaluationMy overall impression of this article is positive. In particular, I would prescribe this article will be excellent after a some methodological problems ar constituteed. The paper clearly identifies a research move and provides an important insight that expands our understanding of exchange rate constitution. still, I will present some comments and recommendations for improvement.Comment 1 ( opening and Causal Mechanism)In general, the guess and hypotheses are clearly presented and easy to understand. However, one part of the theoretical combine between PTAs and exchange rate policy is missing and should be discussed to a greater extent perfect(a)ly. This whitethorn simply be a matter of terminology, or it whitethorn s ignalise a missing link in the causative chain. The authors cast that PTAs generally commit members to more extensive clear raft (2). This work outms to indicate the causal chemical apparatus behind the story PTAs tie the hands of governments who trust to employ trade protection, so they resort to exchange rate policy instead of tariffs or some protestent means.However, PTAs are not all the equal in the way they constrain behavior get wording trade protection (Baccini, Dr, Elsig Milewicz, 2011, Kucik, 2012). While the authors note substantial cross-national magnetic declination in PTA participation, the word of honor of mutation in the PTAs themselves is inadequate. PTAs are not homogenous and in reality vary substantially. Baccini et al. and Kucik some(prenominal) explain that renewing in PTA design and implementation goes far beyond simple free-trade protections to include intellectual property, investments, enforcement, and charge signifi tail endtly differin g tariff levels and exemptions. Is the papers theory based on free-trade commitments generally or PTAs specifically? In footnote 9 on page 4, the authors state that GATT/WTO social station had no influence on exchange rate plectron even though in theory it should constrain trade policy choice in the same way a PTA does. This leads to some confusion almost the causal mechanism that indigences to be clarified.What on the nose is the causal mechanism within PTA participation and wherefore does it fail in other commitments to free trade? In addition, I would like to know if the large variation in PTA design do the causal mechanism. These questions need to be answered to straighten out the argument.I have a second concern regarding the assumptions behind the theory. For the causal mechanism to work, the nation must feel pressure to comply with trade restrictions in the PTA. Otherwise, there is no incentive to use exchange rate policy to circumvent the PTA. However, others research has shown that compliance with international agreements is not square(a) and the intention to comply cannot be assumed (Simmons, 1998). Some nations may join PTAs with no intention to comply at all. Others may sign a PTA because they already intended to behave in accordance with the free trade commitments anyway. In either case, the causal mechanism of the paper is undermined. If Simmons and others are correct, a PTA may not provide the restraint the authors assume it does. Although a thorough discussion of compliance is not necessary, I would like to externalise it mentioned at least briefly. Both of these comments lead to some concerns nearly the data.Comment 2 (Data)I have two comments regarding the data. The first is a concern about potential measurement errors that follows from my questions about the causal mechanism. The primary explanatory inconstant BasePTA uses the PTA dataset based on Mansfield et al. (2007). However, the data include significant heterogeneity in the likely causal mechanism (free trade commitments) that is not measured properly. Kucik notes that At one end of the design spectrum, roughly 25% of all PTAs sacrifice their members full discretion over the use of escape clauses, imposing actually few if any regulations relating to the enforcement of the contracts flexibility system. At the other end, no less than 27% of PTAs place strict limits on (or whole forbid) the use of flexibility (2012, 97). If this is true, a highly flexible PTA may actually be similar to an observation without a PTA at all. A more refined measurement of the causal mechanism than simple PTA participation may be needed.My second concern regarding the data is related to selection effects. Countries do not join PTAs randomly. For example, democracies are more likely to participate in PTAs (Mansfield, Milner, and Rosendorff, 2002). In addition, there may be other unobserved reasons that singular countries decide to enter into PTAs especially with their base country. I would like to see a more incidented discussion regarding selection effects and mayhap some statistical method to test for it such as a Heckman model.Comment 3 (Methodology)Two problems with endogeneity in the models need to be address. One of the primary dependent changeables, Undervaluation, is calculated using gross domestic product per capita (5) to control for the fact that non-tradable goods tend to be cheaper in poorer countries. This is problematic when GDP per capita is also utilise as an explanatory variable in models 3 and 4 as shown in Table 4. A model using the same variable on both sides of the equation potentially causes problems.This is especially problematic considering the limitations of the other variable capturing the concept of undervaluation REER. According to the authors, REER fails to beguile the concept at all REER does not actually indicate whether a currency is over- or undervalued (5). It lonesome(prenominal) measures changes in the excha nge rate relative to the baseline year. The variable Undervaluation was added to correct this shortcoming, but is hampered by endogeneity. The combination of these two factors may be why the findings about exchange rate levels are not definitive.Another pulp of endogeneity sneaks into the authors model. Beaulieu, Cox, Saiegh (2012) illustrate that GDP per capita and regime types are endogenous. High levels of GDP per capita may simply be an indication of long term elective government. When both variables are include in models predicting exchange rate policy, the resulting coefficients may be incorrect. The models reported in Tables 2 4 include both GDP per capita (log) as well as democracy (POLITY2) and result in irreconcilable levels of statistical significance for both variables. This endogeneity should be addressed using a proxy or other methods.I also have a minor concern with omitted variable bias. Bernhard, et al. (2002) emphasize that Exchange rate policy and Central Ban k Independence (CBI) cannot be studied in isolation. They have potentially overlapping effects and measurements of both need to be included in a model explaining monetary policy. I recommend incorporating an supererogatory variable that measures CBI.My final concern with methodology has to do with the operationalization of the concept of democratic institutions. The authors briefly note that domestic political institutions influence exchange rate policy. Specifically, the constitution of the electoral process and interest host influence can result in variations in exchange rate policy (for example, Moore Mukherjee 2006 Mukherjee, Bagozzi, and Joo 2014). In addition, Bearce (2014) shows that democracies manipulate exchange rate policy to appease domestic groups without regard to PTAs. To control for this, the authors use the Polity2 variable and two export composition variables. However the composite measurement of democracy fails to account for the variation in political institu tions (such as parliamentary systems) that have been found causal in influencing exchange rate policy. In addition, the variables Mfg Exports and Ag Exports fail to account for an interest groups ability to influence policy. To fully control for democratic institutions, the authors need to identify the relevant democratic institutions and use a variable to capture those institutions. The Polity2 composite is inadequate.Comment 4 (Discussion and Implications)My first comment about the discussion is positive. I think the model extension to capture the interaction effects between BasePTA and Base Trade is excellent and insightful. In particular, Figure 1 is very well done and clearly illustrates this effect. However, the rest of the discussion of the findings is overshadowed by the data and methodological problems. In particular, the comment about the noisy (12) nature of the findings regarding exchange rate levels seems like a cop-out. I would rather see the methodology strengthened i nstead of excuses (although to be fair, exchange rate levels are indeed noisy).Smaller issuesThe general structure of the paper is solid and the committal to writing is clear, but I have some comments regarding minor issues that could improve the meet of this paper.Comment 1 (Primary Dependent Variable discussion)I am interested by the comment that the potential measurements of the dependent variable (Exchange Rate regimen) differ in methodology and yield quite different classifications across countries and over time (5). This caused a red flag and left me concerned initially. valid and reliable measurement of this variable is essential to properly test the hypothesis. I recommend rewording this and explaining more simply from the start why this variation exists and why it does not threaten the model.Comment 2 (Inflation Variable discussion)The swelling variable (6) uses two sources to account for missing observations (World Bank and IMF). I am concerned that the measurement me thodology may not be exactly the same and could introduce bias when the observations are combined. A brief disapprobation or two covering the compatibility between the two sources would eliminate this concern.passport to the editorRevisions required This paper will make a hygienic contribution to the literature with some revisions. My biggest concern has to do with the causal mechanism and how the concept is captured in the primary explanatory variable. Explaining this in more detail and addressing the other issues will make this paper ready for publication.ReferencesBeaulieu, E., Cox, G. and Saiegh, S. (2012). Sovereign Debt and Regime Type Reconsidering the Democratic Advantage. International Organization, 66(04) 709-738Baccini, Leonardo, Andreas Dr, Manfred Elsig and Karolina Milewicz (2011). The Design of Preferential Trade Agreements A New Dataset in the Making, WTO Staff Working radical ERSD-2011-10Bearce, David (2014). A Political Explanation for Exchange-Rate Regime Gaps. The Journal of authorities, 76(1) 5872Bernhard, William, J. Lawrence Broz, and William Roberts Clark (2002). The Political Economy of Monetary Institutions. International Organization, 5 693-723J Lawrence Broz and curing Werfel (2014). Exchange Rates and Industry Demands for Trade Protection. International Organization, 68(02)393416Kucik, Jeffrey (2012). The Domestic Politics of Institutional Design Producer Preferences over Trade Agreement Rules. economics Politics 24(2)95118Mansfield, Edward, Helen Milner, and Jon Pevehouse. (2007). Vetoing Co-operation The Impact of Veto Players on Preferential Trade Agreements. British Journal of Political Science 37 403432.Mansfield, Edward, Helen Milner, and Peter Rosendorff (2002). wherefore Democracies Cooperate More Electoral Control and International Trade Agreements International Organization, 56(3) 477-513Moore, Will and Bumba Mukherjee (2006). Coalition Government Formation and Foreign Exchange Markets Theory and Evidence from Euro pe. International Studies Quarterly, 50(1)93118Mukherjee, Bumba, Benjamin Bagozzi, and Minhyung Joo (2014). Foreign Currency Liabilities, ships company Systems and Exchange Rate Overvaluation. IPES Conference Paper 144Simmons, Beth (1998) deference with International Agreements. Annual Review of Political Science 175-93