AClimate and Trade

In contrast, the intensive margin is defined as country j’s exports to destination m relative to world exports to destination m for the same set of goods: IM jm XjmP i∈I jm XWmi:specification for the impact of exchange rate regimes on aggregate bi-lateral trade and the extensive and intensive margins separately. One key feature of the gravity equation for aggregate bilateral trade is that it can be derived from explicit microeconomic foundations, as, forBased on this decomposition, the paper estimates a gravity equationComment Stephen J. Redding, London School of Economics and CEPR I very much enjoyed reading this paper, which addresses an important policy‐relevant issue. The paper begins by presenting empirical evi-dence on the impact of currency unions and exchange rate pegs on the intensive and extensive margins of trade. The paper then moves on to develop a stochastic general equilibriummodel that provides a natural explanation for the empirical results. Themain finding of the paper is that currency unions raise aggregate bilateral trade flows through the exten-sive margin whereas direct exchange rate pegs raise bilateral trade through the intensive margin. The empirical analysis begins with a decomposition of aggregate bilat-eral trade into an extensive and intensive margin following Hummels and Klenow (2005). In this decomposition, the extensive margin is defined as the count of goods i exported by source j to destinationmweighted by their importance for world exports: EM jm