No full-text available
To read the full-text of this research,
you can request a copy directly from the authors.
The Relationship between Exchange Rates and International Trade: A Literature Review
Abstract
This paper surveys a wide body of economic literature on the relationship between currencies and trade. Specifically, two main issues are investigated: the impact on international trade of exchange rate volatility and of currency misalignments. On average, exchange rate volatility has a negative (even if not large) impact on trade flows. The extent of this effect depends on a number of factors, including the existence of hedging instruments, the structure of production (e.g. the prevalence of small firms), and the degree of economic integration across countries. Exchange rate misalignments are predicted to have short-run effects in models with price rigidities, but the exact impact depends on a number of features, such as the pricing strategy of firms engaging in international trade and the importance of global production networks. This effect is predicted to disappear in the long-run, unless some other distortion characterizes the economy. Empirical results confirm that short-run effects can exist, but their size and persistence over time are not consistent across different studies.
... That is, depreciations can make exporting more profitable and encourage changes in firms' decision regarding their entry into exporting, what to export (number of products) as well as where to export (number of countries). In general, misalignment or movements in exchange rates can have impacts on a country's trade patterns in at least two rather direct channels (see also Auboin and Ruta (2013)). First, changes in the exchange rate can induce changes in prices and hence can influence the volume of trade as well as incentives to import and export. ...
... The necessary macro level data (mainly exchange rate and price related variables and GDP of destination economies) are obtained from IMF's IFS database as well as from World Bank's World Development Indicators database. One merit of using a firm level data for the analysis at hand is that a macro variable like exchange rate, which is normally considered endogenous variable in aggregate level analysis, can be treated as exogenous (see also Auboin and Ruta (2013)). ...
... For an extensive review of the literature in the area seeAuboin and Ruta (2013).6 Obstfeld and Rogoff(2000)Listed the "exchange rate disconnect puzzle" as one of the six major empirical puzzles in international macroeconomics. ...
... Either fixed, or floating the stability of the exchange rate is more proper. 6 Research such as Auboin & Ruta (2011) and Ozturk (2006) mainly study the effects of exchange rate volatility on the volume of international trade and the impact on international trade of exchange rate volatility and of currency misalignments. This study covers a broader and total analytical framework such as economic growth, trade volume, exchange rate pass-through, current account and productive sectors. ...
... Auboin & Ruta (2011) andOzturk (2006) give a detailed literature review. ...
... As a result, it appears that the impact of exchange rates and interest rates on international trade in the sample countries is significant. Auboin and Ruta (2011) established that the regression coefficient links exchange rate exposure and international trade. In their pilot study, Auboin and Ruta (2013) adhered to this assumption, elucidating the connection between exchange rates and international trade by examining the influence of currency misalignments on international trade flows. ...
This study focuses on the impact of exchange rates, interest rates, and international trade in 12 selected Southern African Development Community (SADC) countries. The lack of studies from Africa that investigated the impact between exchange rate, interest rate, and international trade served as a catalyst for this study. Additionally, this study employed the autoregressive distributed lag (ARDL) method to examine the impact of exchange rate, interest rate, and international trade for the period 2000 to 2021. Therefore, using the ARDL technique, the study found a significant negative impact between exchange rate and interest rate in the long run, while international trade had a positive but insignificant impact. Due to the negative exchange rate findings, this study concludes that the SADC countries must develop strategies to promote international trade, reduce trade deficits, and encourage economic growth. On the other hand, this study contributes to the intricate interplay of exchange rates, interest rates, and international trade in SADC by providing insights for policymakers to enhance economic stability and long-term growth ultimately benefiting the region's economy and society.
... Exchange rates are the comparative prices of purchasable to non-purchasable goods. They measure the competitiveness between different countries by taking into account comparative prices, costs and productivity between various countries (Auboin & Ruta, 2011). The fluctuation and volatility of exchange rates results in high economic uncertainty for international investors. ...
... Exchange rates are the comparative prices of purchasable to non-purchasable goods. They measure the competitiveness between different countries by taking into account comparative prices, costs and productivity between various countries (Auboin & Ruta, 2011). The fluctuation and volatility of exchange rates results in high economic uncertainty for international investors. ...
This study was carried out to analyze the impact of ecological footprint (EFP), exchange rate (EXC) and bio-capacity (BC) on foreign direct investment (FDI) in South Africa. The study was based on monthly time series data from 1996 to 2017. Asymmetric dynamic multiplier, Linear and Nonlinear Autoregressive distributed lag models were used to establish the relationship between the selected variables. Linear ARDL reveal significant symmetric relationship between FDI, ecological footprint, biocapacity and exchange rate in the short run. Nonlinear Autoregressive distributed lag (NARDL) bounds test confirmed the existence of cointegration between the variables. The non-linear short-run results reveal that positive shock of EXC affect FDI negatively. While positive shock from EFP has a significant and positive effect on FDI. Interestingly, in the long run the negative shock of EXC on FDI is negative while the positive shock of EXC affects FDI positively. Furthermore, the long-run asymmetric dynamic multiplier showed that the cumulative positive and negative effect of EFP and BC on FDI is positive. Hence, it is important that policies be put in place to ensure environmental sustainability and stable exchange rate while growing the South African economy. Policy regulations on production procedures in South Africa should be established to encourage advanced clean technologies in FDI production sectors
... Since exchange rate is perceived as a policy tool to stimulate exports and their competitiveness particularly in developing countries, reasons pertaining to this inconsistency are of interest to many researchers. The size of the share of imports in the cost structure of export production (Iurii 2014), behavior of exporters towards currency risk and uncertainty (Aftab et al. 2012), differences in exporter firms' characteristics such as productivity (Berthou and Dhyne 2018) and the nature of products exported are an unexclusive list of examples causing this ambiguity in exports' response to changes in exchange rate (for synthesis studies see Auboin and Ruta 2013;Bouoiyour and Selmi 2015). Therefore, analyzing the impact of changes in exchange rate only at the aggregate-level or country-level, which is the greater portion in prevailing literature, does not allow for a heterogeneity analysis of responses across sectors and firms and thus will only result in weakly targeted policy recommendations. ...
This paper explores the impact of currency depreciation on the firm-product-destination level exports of Egypt, using a rare dataset of monthly-transaction level custom data over the period 2005-2016. Using computed monthly real exchange rates and product-specific control variables, the empirical analysis is undertaken in two steps. First, we conduct aggregate-level estimations to investigate the response of the intensive margin of export trade to real depreciation in the Egyptian pound. Second, we run a series of heterogeneity analyses according to different data classifications such as exporter size, exported product type, region of export destinations, different time intervals in the sample period and finally the exported product's sector, subsector (HS2) and their frequently exported product groups (HS4). Aggregate-level results confirm that the overall real depreciation affects export value in a positive and significant way, mainly driven by the higher magnitude of the positive effect on export quantity. Nevertheless, the heterogeneity analyses reveal that the response of exports is not homogenous among all data classifications. Hence, the framework of analysis used in this paper provides additional impetus for a better and more informed evaluation of product-specific export promoting policies in Egypt. الملخص انخفاض تأثير الدراسة هذه تناقش الجنيه الشركات مستوى على المصرية الصادرات على-المنتجات-الوجهة التصديرية الفترة خالل الشهرية للمعامالت جمركية بيانات مجموعة باستخدام وذلك ، 2005-2016 وباستخدام. سعر المحسوب الشهري الحقيقي الصرف ل التحكم ومتغيرات ، منتج كل يتكون ، التطبيقي التحليل هذه في الورقة من خطوتين تقديرات بوضع قمنا أوال، : الكلي المستوى على الصادرات لتجارة المكثف الهامش استجابة في للبحث الجنيه. النخفاض و بن التغاير تحليالت من سلسلة بإجراء قمنا ثانيا، المختلفة التصنيفية البيانات من مجموعة على اء الم الشركة حجم مثل المصد المنتج ونوع صدرة، و التصديرية، الوجهات ومنطقة ر، لفترة مختلفة زمنية فترات العينة، المصد المنتج إليه ينتمي الذي القطاع وأخيرا (الفرعي والقطاع ر HS2 المصد المنتجات ومجموعة) رة بشكل متواتر (HS4 .) أن على مجملها في النتائج وتؤكد قيمة على يؤثر الصرف سعر في الكلي الحقيقي االنخفاض أن إال الصادرات. كم على اإليجابي التأثير بارتفاع األساس في ذلك في مدفوعا ومعنوية إيجابية بصورة الصادرات عدم إلى تشير التغاير تحليالت تجانس ثم ومن التصنيفية؛ البيانات كل في الصادرات استجابة يدعو التحليل تقييم إلى وأكثر أفضل مصر. في الصادرات تحفيز لسياسات اطالعا JEL classification: F13, F23, F31, O24
... The most common approach of the academic literature relates such fluctuations concerning export flows at both national (Bailey et al., 1987;De Grauwe, 1988;Viaene & De Vries, 1992;Kroner & Lastrapes, 1993;McKenzie, 1999;Arize et al., 2008;Mukherjee & Pozo, 2011), and sectoral levels (Bredin et al., 2003;Péridy, 2003;Byrne et al. 2008). There are also several literature reviews that catch existing approaches and gaps found; showing inconclusive varying effects of the exchange misalignments in the commercial flows (Ozturk, 2006;Bahmani-Oskooee & Hegerty, 2007;Ćorić & Pugh, 2010;Auboin & Ruta, 2013). ...
There is evidence of how the appreciation of the dollar decreases the likelihood of survival of exporting firms. The effect transfer of the real exchange rate dollar-weight on flower exports to the United States will be evaluated. The study was based on data from 160 companies with quarterly information between 2009-2015. With panel data models, the negative impact of the appreciation of the dollar on the price in pesos and the volume exported. The percentage change in export prices in local currency resulting from an appreciation of the exchange rate; it is transmitted in a 110% to the prices of the destination country, causing the paradox of an increase in the profits of the exporters compared with a decline in export volume. A breakdown by company size the effect is lower in large than in small and medium-sized enterprises. By type of enterprise the effect is greater in the international trading companies. The results obtained are useful both at the government level for the creation of policies for the protection and management level in the decision-making of management of exchange rate risk.
... Their findings suggest the importance of exchange rate misalignment while disregarding that of exchange rate volatility. However, in their literature review Auboin and Ruta (2011), after consulting a large literature on the same issue, conclude that on average, exchange rate volatility has a negative impact on trade flows, but that the extent of this effect depends on a number of factors (such as hedging instruments, the structure of production and the degree of economic integration across countries). Regarding the exchange rate misalignments, the empirical results analysed in Auboin and Ruta (2011) mostly confirm that short-run effects can exist, but their size and persistence over time are not consistent across different studies and the impact again depends on number of features. ...
Most European transition countries have fixed or highly managed flexible exchange
rate regimes. This exchange rate rigidity is sometimes argued to worsen the trade
balance by keeping the currency overvalued. However, there is no unambiguous
evidence that currency depreciation/devaluation positively affects trade balance and
leads towards the adjustment, even in the short-run. Therefore, we examine the effect
of real effective exchange rate (hereafter REER) on trade balance in European
transition economies over the period 2000-2015. By using fixed effect model for
static and generalised method of moments for dynamic estimation, we find that there
is an adverse effect of the REER on trade balance in European transition countries
over the period 2000-2015. Namely, depreciation of REER deteriorates trade
balance in European transition countries, which could be explained by high import
dependence and low export capacity. This implies that policymakers in European
transition countries should not use exchange rate policy to improve trade balance.
This is important in the light of their accession towards European economic and
monetary integration, implying that these countries should focus more on using
fiscal, rather than monetary (and exchange rate), policy to adjust trade balance,
which is one of the required real convergence towards the EU standards.
... Activities of the first pillar would be aimed at fostering discussion based on a review of relevant economic theory and case studies that addressed the issue of the relationship between exchange rates and international trade. As stated in the Brazilian proposal, Brazilian diplomats were convinced that " exchange rates do influence, in some cases significantly, the foreign trade performance of any given country " (Auboin and Ruta 2013). So, in order to consolidate this view institutionally, they proposed that the WTO's Working Group on Trade, Debt and Finance should produce a review of specialized theory and empirical evidence. ...
The literature on transnational legal orders (TLOs) establishes new criteria for the elaboration of analyses regarding complex legal and economic issues which transcend the nation state. By looking into the so-called "currency war" controversy of 2010-2013, the paper argues that TLO theory remains limited in its ability to shed light on relevant aspects of cross-border impacts of monetary policy changes.
... See, e.g.,Agenor (1991),Auboin and Ruta (2011), Bahmani-Oskoee (1991),Berman and Berthou (2009), Bruno (1979),Dornbusch (1987),Edwards and Avies (2006),Fleming (1962),Gylfason and Radetzki (1991),Hoffmaister and Vegh (1996),Kamin and Rogers (2000),McCarthy (2010), Meltzer (1948,Mundell (1963),Wang (1995), andVan Wijnbergen (1989). ...
Purpose
Using data for a sample of advanced and developing countries, this paper aims to study the responses of monetary growth and the growth of government spending to external spillovers, namely, the growth of exports and imports, movement in the real effective exchange rate and the change in the oil price. The objective is to study movements in domestic policy variables in open economies that are vulnerable to trade and commodity price shocks.
Design/methodology/approach
The analysis evaluates correlations between the responses of the policy variables to external spillovers. Further, the analysis studies the effects of indicators of economic performance on domestic policy responses to various shifts across countries.
Findings
Higher variability of real and nominal growth increases the fiscal policy response to external spillovers with an aim to stem further variability. Monetary policies appear to be more responsive to trend price inflation with an aim to stem further inflationary pressures. Fiscal policy’s reaction to trend price inflation aims at striking a balance between countering potential inflationary pressures, as well as recessionary conditions attributed to the various spillovers.
Originality/value
Overall, the evidence points to the importance of trade and commodity price shifts to the design of domestic policies. Further indicators of economic performance differentiate the degree of policy responses to trade and commodity price developments with a goal to stem inflationary pressures and reduce aggregate uncertainty.
... In the aftermath of the financial crisis some episodes of large depreciations appeared to have had little impact on exports [5]. Incomplete exchange rate pass-through to (domestic) prices is a part of the explanation for the weak link between exchange rates and exports (see for instance Goldberg and Knetterer [6], Nahamura and Zermon [7], Rodriguez-Lopez [8] or Aubion and Ruta [9] for comprehensive surveys). A number of explanations have been put forward for the less than perfect pass-through, ranging from pricing to-market (see Atkeson and Burstein [10]) and local distribution costs (see Corsetti and Dedola [11]) to short-run nominal rigidities (see Gopinath, Itskhoki and Rigobon [12]). ...
... Exchange rates ER are ussed in direct quotations of nominal bilateral exchange rates. This is in accordance to arguments of Auboin and Ruta (2013) that the choice between nominal and real exchange rate does not affect econometric results. Data of exchange rates are derived from the Eurostat database. ...
Paper is aimed to evaluate effects of exchange rates on the Czech bilateral trade divided into product categories. Paper assumes that different traded product categories are characterized by different price elasticity and every market consists of different consumer and producer behavior patterns, so the study applies territorial and commodity approach to foreign trade disaggregation. Long term effects are assessed by Johansen cointegration and short term effects by vector error correction model. Analysis for the period 1999 -2014 on the SITC 1 and 2 digit data shows that bilateral and majority of commodity trade balances are cointegrated with bilateral exchange rate.
... Either of these is not desirable as it increases the risk or uncertainty in international transaction and thus discourages trade. This view is supported by the International Monetary Fund (IMF) 1984 commissioned study on exchange rate volatility and trade flows and Auboin and Ruta (2011). Volatile real exchange rates are associated with unpredictable movements in the relative prices in the economy. ...
The paper, investigates the hypothesis that exchange rate risk affect international trade. Theoretically and empirically, the results are mix and inconclusive. Our data set that are annual in nature cover the period 1970–2010., were subjected to unit root and cointegration tests Empirical results showed that all variables I(I),except import that is I(0) and are significant at 1,5, and 10 percent.. cointegration results revealed that a stable long run equilibrium relationship exists between the variables. Employing error correction modelling, we estimate the equation using ordinary least squares (OLS). The result revealed that exchange rate volatility is insignificant in explaining variations in imports but significant and positive with respect to export. Also, the result showed that exports have positive and significant impact on imports implying that ability to export is hinged importations. This prompted a causality test that rejected the null hypothesis. The study recommends exchange rate and trade policies that will promote greater exchange rate stability and trade conditions that will promote domestic production in the economy. This we believe will enhance non oil exports and reduce importation. To achieve this, government should deliver efficient infrastructural services, especially power supply and other energy resources.
DOI: 10.5901/mjss.2013.v4n6p401
The disconnect between the exchange rate and its macroeconomic fundamentals has been extensively discussed in the literature. It nonetheless continues to pose theoretical and empirical challenges in the literature. This study examines the relationship between the exchange rate and its fundamentals. This study used the monetary model of exchange rate determination developed in the 1970s. The study used the TAR to estimate the exchange change rate behaviour in response to variations in monetary variables. We found that the exchange rates respond to the interest rate differential, consistent with the predictions of the monetary model of exchange rate determination. Furthermore, in all the regimes, the sizes of coefficients are different, which shows that the exchange rate behaviour is non-linear (asymmetric). While the impact of the interest rate differential in regime 1 and 2 leads to exchange rates appreciating although in regime 2 the results are insignificant, this occurs when the exchange rates fluctuate below 0.87 percentage points. In regime 3, on average, a marginal increase in interest rate deferential leads to an exchange rate depreciation. In some instances, the exchange rates respond to the monetary variables’ changes in line with the predictions of the monetary theory of exchange rate determination. An increase in interest rates in some instances leads to an improvement in the value of the exchange rate. However, the conditions are not constant—they vary depending on the state of exchange rate fluctuation.
Purpose
This study aims to examine the asymmetric S-curve between the trade balances of Pakistan and China at the commodity level using disaggregated data.
Design/methodology/approach
This study focuses on Pakistan and China bilateral trade based on commodity-level data. This study delves into the S-curve phenomena by examining time series data from 1980 to 2023 across 32 three-digit industries/commodities.
Findings
The findings show significant evidence in favor of the “asymmetric S-curve” in 27 out of the 32 industries studied. This study confirms that the devaluation of home currency is not a viable solution always to improve trade balance.
Research limitations/implications
This study considers 32 three-digit industries limiting the generalizability of findings. Due to data unavailability, the authors fail to consider other industries. In the absence of quarterly data on industry-level trade between Pakistan and China, annual data from 1980 to 2023 were used in generating the cross-correlation functions. Previous literature frequently resorted to the general consumer price index with its inherent aggregation issues, whereas this study has opted for commodity price indices to overcome the shortcomings in the estimation of S-curves at the commodity level.
Practical implications
The findings have practical relevance in guiding policy decisions regarding commodity trade, whereas the industry-wise analysis enriches the understanding of the short-term effects of currency depreciation on trade balance dynamics.
Originality/value
The S-curve hypothesis predicts a negative cross-correlation between a country's current exchange rate and its past trade balance and a positive cross-correlation between the current exchange rate and its future trade balance. Previous empirical S-curve studies had the limitation of assuming symmetry in cross-correlation with both current and future trade balance values.
The payment methods used in international trade are of significant importance for the financial flow of the involved parties. When it comes to transferring goods and funds across borders to their new owners, the risks faced by the parties may seem daunting. The use of a letter of credit payment method by banks serves a protective role, enabling the parties to engage in trade more securely. While the expenses linked to this approach are sometimes viewed as challenging for the involved parties, it is considered a significant enabler, particularly in new trade alliances. In fact, exporters' choices are classified in countries' trade statistics based on payment methods. This study aims to uncover the determinants of exports from Türkiye between January 2013 and September 2023, utilizing both cash in advance and letter of credit payment methods. To accomplish this objective, exchange rates and specific inflation indicators, and their causal relationship with export transactions based on payment types was examined using the Toda-Yamamoto causality test. The research findings indicate that exchange rates, inflation, and cash payment variables cause letter of credit payments. Conversely, only the foreign producer price index was identified as a cause for cash-based exports. These findings illustrate that economic indicators, which may pose risks for Turkish exporters, are reasons for important decisions. In light of these findings, recommendations have been made for exporters and policymakers to proceed cautiously in the face of different economic scenarios.
This paper models the relationship between trade shocks and real effective exchange rates (REER) for Nigeria using monthly data from January 2010 to December 2021. The contributions of this paper are twofold: (i) We use the Pesaran et al.’s (J Appl Econom 16(3):289–326, 2001) Linear (Symmetric) as well as Shin et al.’s (Festschrift in honor of Peter Schmidt: Econometric Methods and Applications, Springer, 2014) Nonlinear (Asymmetric) ARDL, (ii) We additionally account for structural breaks in regression models using the Bai and Perron (J Appl Econom 18(1):1–22, 2003) test, which allows for numerous structural alterations. Our research yielded the following conclusions. There is evidence of both short-run and long-run asymmetries. Second, terms of trade improvement led to an appreciation of the local currency in the long run. Third, a degradation in terms of trade has no discernible impact on Nigeria’s real effective exchange rate. Finally, ignoring structural fractures and asymmetries will result in significant prejudices and erroneous findings.
Purpose
Exchange rate volatility is an important factor affecting investors and policymakers. This study aims to examine the impact of uncertainties, in terms of changes in economic policy, monetary policy and global financial markets, on exchange rate volatility.
Design/methodology/approach
The study uses the GARCH (1,1) univariate model to calculate exchange rate volatility. Economic and monetary policy uncertainties are measured using news-based indices, while global financial market volatility is measured using the implied volatility index. Panel autoregressive distributed lag modeling is used to analyze the impact of uncertainty on exchange rate volatility in the short and long run. The sample consists of 26 developed and emerging markets from 2005 to 2020.
Findings
The study finds that economic policy uncertainty significantly increases exchange rate volatility. Similarly, global financial market uncertainty leads to increased exchange rate volatility. The effect of US monetary policy uncertainty reduces exchange rate volatility.
Originality/value
This research contributes to the existing literature on exchange rate fluctuations by examining the impact of uncertainties on exchange rate volatility. The study uses novel news-based indices for measuring economic and monetary policy uncertainties and includes a broader sample of emerging and advanced markets. The findings have important implications for investors and policymakers.
Türkiye sabit kur rejimini uyguladığı 1923-2001 yılları arasında, ilk olarak 7 Eylül 1946 tarihinden başlayarak dış ticaret dengesini sağlamak amacıyla birçok devalüasyon yapmış ancak hiçbir kur müdahalesi beklenen olumlu sonuçları vermemiştir. Türkiye 2001 yılından sonra uygulamaya koyduğu yapısal dönüşümlerden birisi olarak dalgalı kur sistemine geçiş yapmıştır ve bu tarihten sonra piyasa arz ve talep koşullarına göre belirlenen döviz kurunun dış ticaret dengesi üzerine etkileri başlıca araştırma konularından birisi olmuştur. Bu çalışmada 2013:01 – 2022:12 dönemi aylık verileri kullanılarak Türkiye’de reel efektif döviz kuru ile dış ticaret arasındaki nedensellik ilişkisi yapısal değişimi dikkate alan Fourier Bootstrap Toda Yamamoto nedensellik testi ile araştırılmıştır. Analiz sonuçlarına göre Türkiye’de reel efektif döviz kuru ile ithalat ve ihracat arasında nedensellik tespit edilememiştir. Çalışma sonucunda Türkiye’de döviz kurunu etkileyerek, dış ticaret dengesini yönlendirmeye çalışan politikaların başarılı olamayacağı tespit edilmiştir. Bu sebeple dış ticaret dengesini iyileştirmeye odaklanan politikaların üretilen mal ve hizmetlerin niteliksel özelliklerine odaklanmasının daha doğru olacağı düşünülmektedir.
The exchange rate plays an important role in a country's trade and affects the performance. It can be determined by exogenous shocks or by policy, the relative valuations of currencies and their volatility often have important repercussions on international trade, the balance of payments and overall economic performance of the country. This Research paper investigates the issues related to exchange rates on international trade by analyzing the impact that exchange rate volatility and misalignment have on trade and then by exploring whether exchange rate misalignments affect governments' decisions regarding trade policies. The methodology consists of estimating fixed effects models on a detailed based on secondary data. The findings of this study are generally based on literature in supporting the issues of exchange rate misalignment while disregarding that of exchange rate volatility. This paper also shows evidence supporting the argument that trade policy is used to compensate for some of the consequences of an overvalued currency, especially with regard to anti-dumping interventions and comparison report of latest import export differences of India. Keywords: international exchange rate, foreign exchange market, issues of exchange rate in international trade, India's foreign trade Introduction Economic transactions i.e. exchange of goods and services between two are more than two countries is known as international trade while exchange rate is the price of one country's currency expressed in terms of some other currency. According to (Adeniran, 2014) exchange rate determines the relative prices of domestic and foreign goods, as well as the strength of external sector participation in the international trade. According to Jhingan (2009) foreign exchange rate or exchange rate is the rate at which one currency is exchanged for another. The recent debate on issues persistent trade imbalances and on the resurgence of non-traditional trade restrictive measures has led to a renewed interest in better understanding the issues related to exchange rates on international trade. In spite of the increasing number of research studies on the topic, on the actual effect of exchange rates on international trade is still an open and controversial question. The theoretical literature on the issue provides little guidance as the presumption that exchange rates directly affect trade depends on a number of specific assumptions which do not hold in all cases of trade policies. This paper contributes to understanding the issues relationship between exchange rates and international trade by investigating the issues of exchange rate volatility and misalignment on international trade and by exploring whether exchange rate misalignment affects trade policy decisions.
This article provides a philosophical examination of the Bitcoin concept of property rights protection. To that end, several fundamental questions must be addressed on the subject, including what money is, what purpose it seeks to serve, and how the system that supports it is related to the concept of property rights. Finally, it is important to identity what, if anything, Bitcoin has to offer in these matters. This article concludes that the primary function of money as a social institution is to store one’s labour as part of one’s property right. In comparison to fiat currency, Bitcoin is the superior medium of exchange. However, the ideological foundation of Bitcoin has philosophical issues: it is based on the false premises of absolute individual property rights derived from the concept of natural rights, which is incompatible with Indonesia’s economic commitment and goals of establishing a welfare state, as reflected in the constitution.
Foreign trade she one of the most important economic sectors in all countries of the world through its positive contribution to increasing economic growth rates and national income. Achieving structural transformations in many economies of different countries by providing consumer and production goods. As well as considering it as a measure by which one can know the degree of trade openness towards the outside world of any country in the world. The research relied on studying (public spending, gross domestic product, foreign direct investment and exchange rates) and analyzing them in order to estimate that relationship.Research amid to describe the effect of some macroeconomic variables on Iran's foreign trade in the long and short term through the use of modern economic measurement methods and estimation of that relationship during the research period (1990-2019). And after studying the static time series of the data of the variables used by using the co-integration method and relying on the time-delayed gaps regression model ARDL. The research concluded that there is a short-term relationship between the dependent variable and the independent variables, and the existence of a long-term relationship. Through results that appeared show that the sign is negative between foreign trade and variable public spending but not significance at the level of (5%). With the presence of a positive relationship between the domestic product and foreign trade and it is significant at the level of significance (5%). And that any increase in the domestic product the total by (1%) leads to an increase of (0.774%) in foreign trade. With the presence of a positive relationship between foreign trade and foreign direct investment, and that any increase in foreign direct investment by (1%) leads to an increase of (0.128%) in foreign trade. As well as the existence of the inverse relationship between exchange rates and foreign trade, which is not significant at the level of significance (5%). Recommended search paying attention to foreign trade, diversifying production and export sources, encouraging a policy of protection for national production through imposing customs taxes on imported goods, supporting local production sectors, adopting an exchange rate policy that helps increase foreign trade, the need to reform the banking system, including the industrial, agricultural and service sectors.
Foreign trade is one of the basic components of economic relations between the countries of the world, as it brings them together in one economic and international system, as it leads to the transfer of many economies of the countries of the world from one case to another. The global economy has worked to change it, and trade is affected by several internal and external factors, including macroeconomic variables. The research aims to: Identify some macro variables and their relationship to Saudi Arabia’s foreign trade for the long and short term using modern analytical and standard methods and their estimation for the period (1990-2019). The research reached its measurement aspect after studying the static time series and using the method of the co-integration methodology through the ARDL model. The research proved the existence of a short-term relationship between the independent variables and the dependent variable, and the results of the long-term relationship between foreign trade and macroeconomic variables in the Kingdom of Saudi Arabia showed that the signal is positive between public spending and foreign trade, but it is not significant at the level of morale (5%). And that the relationship is direct between the gross domestic product and foreign trade, and that an increase in the gross domestic product by (1%). Leads to an increase in foreign trade by (1.22%). As well as the existence of a direct relationship between foreign direct investment and foreign trade, and it was found that the increase in foreign direct investment by (1%). Leads to an increase in foreign trade by (0.047%). The research recommended paying attention to foreign trade and its tools that are needed by development, especially in oil-producing countries, as Saudi Arabia is an oil country, by taking advantage of oil revenues in the formation of its export structure. And focusing on increasing interest in studies who adopted the relationship between macroeconomic variables and foreign trade in order to know the impact of these variables and their positive and negative effects on trade. Since there is a long-term relationship between the foreign trade variable and the macro variables under discussion, it is necessary to focus on public spending and emphasize investment spending by taking advantage of the gross domestic product it has a direct relationship with foreign trade.
This study is an attempt to examine the impact of currency misalignment on the trade balance of emerging market economies from 1980 through 2016. It firstly measures the equilibrium RER and corresponding misalignment series of 21 EMEs separately adopting a single equation approach and then includes them in the trade regression together with undervaluation and overvaluation to estimate the dynamic relationship between the trade balance and real exchange rate misalignment employing the system generalized method of moment estimation approach. The study suggests that, being a composite series of undervaluation and overvaluation, higher real exchange rate misalignment helps recover trade imbalances. It also identifies that undervaluation improves trade balance, while overvaluation cuts it down. The study identifies that the misalignment series of RER for most of the EMEs are substantially dominated by overvaluation episodes, and hence the opposing impact of undervaluation and currency misalignment on the trade balance of EMEs is not surprising. From the policy perspective, competitiveness achieved through currency movements helps emerging market economies not only to improve trade balance but also to withstand vulnerability that arises from huge external borrowings creating a strong external payment position.
This study investigates the role of exchange rate and relative import price in sawnwood import demand in a panel of 30 African countries during 1985–2016 using the modified heterogeneous panel data techniques and the modified dynamic common correlated effect method. In the sawnwood import demand modelling and analysis, we controlled for the effects of structural changes and common shocks arising from increased economic and financial integration among countries which may affect our findings. Based on alternative estimators, the regression results reveal that real domestic income, real effective exchange rate, sawnwood relative import price and external reserves are significant determinants of sawnwood import demand in the long-run. The results show that the sawnwood import demand was fairly income inelastic, but, highly inelastic to changes in real effective exchange rate, real external reserves and relative sawnwood import price. Also, real effective exchange rate and sawnwood relative import price engender asymmetric impact on sawnwood import demand in Africa. A disaggregate analysis reveals variations of asymmetric impacts across countries. Some policy implications are drawn for managing the balance of payments problem and pollution associated with sawnwood consumption and for industrialization and social welfare.
O objetivo deste trabalho é investigar empiricamente o desempenho e asdiferenças entre as exportações convencionais e as exportações relacionadas às cadeias globais de valor (CGV) em resposta aos seguintes determinantes: taxa de câmbioem três conceitos (nível, volatilidade e desalinhamento), efeito renda e as consequências da crise financeira internacional. Para tanto, utilizam-se três métodos de dadosem painel estático e dinâmico para um conjunto de 59 países, no período de 2000 a2011. Os resultados das estimações confirmam: a) a elasticidade-preço das exportaçõesrelacionadas às CGV são maiores em comparação à elasticidade-preço das exportaçõesconvencionais; b) o aumento da volatilidade da taxa de câmbio possui menores ounenhum impacto nas exportações vinculadas às CGV; e c) países com maiores participações a jusante nas CGV estão sujeitos a menores efeitos advindos de um desalinhamento cambial. Além disso, pode-se afirmar que a crise do subprime gerou efeitosnegativos mais proeminentes nas exportações associadas às CGV em relação às exportações tradicionais.
This study aims to contribute in the area of foreign exchange forecasting. Exchange rate plays an essential role for the economic policy of a country. Due to the floating exchange rate regime, and ever-changing economic conditions, analysts have observed significant volatility in the exchange rates. However, exchange rate forecasting has been a challenging task before the analysts over the years. Various stakeholders such as the central bank, government, and investors try to maximize the returns and minimize the risk in their decision-making using exchange rate forecasting. The study aims to propose a novel ensemble technique to forecast daily exchange rates for the three most traded currency pairs (EUR/USD, GBP/USD, and JPY/USD). The ensemble technique combines the linear and non-linear time-series forecasting techniques (mean forecast, ARIMA, and neural network) with their most optimal weights. We have taken the data of more than seven years, and the results indicate that the proposed methodology could be an effective technique to forecast better as compared to the component models separately. The study has crucial economic and academic implications. The results derived from this study would be useful for policymakers, regulators, investors, speculators, and arbitrageurs.
We examine the recent evolution of salient trade costs in agricultural and food markets, and changes in their composition. We review ways to measure costs and provide guidance with policy prescriptions to reduce them. We pay attention to transportation costs, border measures, and standard‐like nontariff measures. By pointing out limitations in current approaches and recent developments, we aim to improve our understanding of their effects and derive clearer prescriptions. We suggest promising directions for further research and investigation of agricultural trade costs, including on the emerging debate on gene editing and trade, transportation costs, and mainstreaming recent advances in analyzing nontariff measures.
The model is named the dynamic IS-LM-X model of exchange rate movements, where X denotes external sector.
This paper investigates the asymmetric effect of exchange rate changes on cross-border trade in Nigeria. The investigation becomes necessary because several studies have reported insignificant results in attempting to establish a link between these two variables using symmetric specification. Whereas, there are strong evidence of nonlinear mean-reverting association because some exchange rate changes of the same magnitude exhibit different effects on other variables of interest. Having separated the real effective exchange rate into both depreciation and appreciation regimes using the partial sum processes based on logistic smooth-transition and exponential smooth-transition, results from the nonlinear autoregressive distributed lags show that exchange rate appreciation had a statistically significant negative relationship with cross-border trade in Nigeria. The study concludes that the relationship between real effective exchange rate and cross-border trade is asymmetric. (Depreciation and appreciation of equal magnitude do not have the same effect on cross-border trade in Nigeria.) The study recommends that policy makers should consider models that allow a nonlinear adjustment of exchange rates which may produce outcomes supporting an effective devaluation or appreciation policy, at least against some trading partners.
This article examines the effects of domestic currency depreciation on agricultural exports from Pakistan including the responses of price and quantity margins. It uses highly disaggregated firm‐level data that contains the exchange rates of the actual currencies of invoicing at the transaction level. The study finds that the currency depreciation positively affects both intensive and extensive margins. The intensive margin increase in agricultural exports operates mainly through prices, whereas the response of quantities is relatively smaller. Moreover, depreciation improves the extensive margins of firms and products and expands the client base in existing markets. These responses vary widely across firms' exporting experience, trade orientation, sectoral and spatial distribution, exchange rate regimes, and invoicing currencies.
Imports and exports play a vital role in every country’s economy. Both of these variables depend to a great extent either on the appreciation or depreciation of the country’s currency. Imports, exports and exchange rate are some of main determinants of economic growth and are also affected by economic growth. This paper aims to determine the effect of exchange rate and economic growth on both exports and imports in the South African economy. To achieve this objective, a test for cointegration was carried out using the autoregressive distributed lag (ARDL) model. This model was applied on a time series quarterly data from 2008 to 2018. The error correction model and Granger Causality tests were performed to define the short-run and causal relationship amongst variables. The regression analyses reveals the existence of a long-run relationship within the estimated variables. In support of the economic literature, the study findings indicated that economic growth positively effects on both exports and imports. Nonetheless, the analysis depicted that in the long-run, Rand appreciation leads to more imports and fewer exports. Furthermore, the Granger Causality text suggested a bidirectional causality between the exchange rate and imports; between economic growth and imports, and between the exchange rate and economic growth. Succinctly, the used variables have a causal relationship with one another. Based on the findings, the study highlighted the pertinence of economic growth and emphasised the role played by the exchange rate in maintaining the balance between imports and exports. The study recommended that both currency value and economic growth should be given urgent attention in order to revive the deteriorating economy of South Africa.
This paper estimates a gravity model of trade to evaluate the trade effects of the Euro on sectoral trade within the Eurozone (EZ), the CFA Franc Zone (CFA) and between the EZ and the CFA, when CFA countries acquired fixed rates against the non-francophone EZ members. The formation of the EZ provides a quasi-natural experiment to estimate the effects on trade of fixed exchange rates, since the change in exchange rate regime for CFA countries with all EZ countries but France was not trade related. This is tested using sectoral trade data for 175 countries over the period 1995–2016 and validated using a longer time period starting in the seventies. The main departure from Frankel (2008), is the estimation of a structural gravity model using sectoral trade and bilateral-sectoral fixed effects as well as controls for multilateral resistance, namely time varying country-sector fixed-effects for exporters and importers, in a PPML framework. The main results indicate that the introduction of the Euro does show positive and significant effects for export flows from the CFA to other EZ countries different from France, whereas exports in the opposite direction are negatively affected. Moreover, the results differ by sector and we find that agricultural and homogeneous goods exports from CFA countries to Euro adopters increased by around forty and hundred twenty percent, respectively after the euro adoption.
This chapter contributes to the empirical literature on the role of exchange rate in a country’s trade performance. In particular, we investigate the effects of exchange rate misalignment on long-term export performance of the Serbian economy, by using monthly data for the last decade. International trade theories suggest that a deterioration of export performance should be expected in the conditions of real currency appreciation, while depreciated currency tends to benefit the exporters. However, statistical data on real effective exchange rate and aggregated data of Serbian exports indicate that the ambience of overvalued national currency did not harm export performance. Employing the Engle-Granger test of cointegration, we find no stable long-run relation between the time series data of exchange rate and export, while Granger causality test indicates a unidirectional causality that runs from exchange rate to export. These findings suggest that export dynamics is likely to be affected by a combination of various determinants, both demand- and supply-side variables. By estimating a multiple regression model, we test the potential influence of industrial production index, unit labor costs, fiscal balance, and world demand on aggregate export data. The findings confirm the insignificance of real exchange rate as a determinant of Serbian exports, disregarding the normative theory assumptions, while world demand and industrial achievement significantly impact the export performance. Our study offers potential explanations of export growth in the ambience of real currency appreciation and advocates for a flexible exchange rate policy that would take into account long-term effects on trade performance.
Bu çalışmada, kırılgan beşli olarak nitelendirilen ülkelerde dış ticaret, reel döviz kuru ve ticari açıklık (trade openness) arasındaki kısa ve uzun dönemli ilişki, 2000-2014 dönemine ait panel verileri kullanılarak araştırılmaktadır. Ampirik analiz için, Panel ARDL yöntemi, Granger nedensellik testi ve varyans ayrıştırma analizi kullanılmıştır. Analizler sonucunda, hem kısa dönemde hem de uzun dönemde dış ticaret ile reel döviz kuru arasında negatif ve istatiksel olarak anlamlı bir ilişki mevcuttur. Diğer taraftan dış ticaret ile ticari açıklık göstergesi arasında pozitif ve istatiksel olarak anlamlı bir ilişki olduğu sonucuna ulaşılmıştır. Ayrıca, Granger nedensellik testi sonucuna göre ticari açıklıktan dış ticarete doğru tek yönlü nedensellik vardır. Ama reel döviz kurundan dış ticarete doğru bir nedensellik yoktur.
Based on estimation of the gravity equation, this article aims to scrutinise the trade effects emanating from the economic integration of the European Union (EU) by focusing on the trade diversion and trade creation effects of the fifth EU enlargement on 12 groups of agricultural and food products. This paper analyses the changes due to the EU’s enlargement of trade patterns in the agricultural and food sectors among the EU member states and between EU and non-EU countries as well as the effects of the enlargement on exports of agricultural and food products from selected Asian countries to the EU market. Our analysis shows no decline in exports from EU to non-EU countries. Trade creation effects are significantly high for 4 product groups: seafood, woody plants, beverages and tobacco, and animal and vegetable materials. However, trade diversion effects are found in animal and vegetable oils and textile fibres. Moreover, the economic integration has had no significant effect on exports from Asian countries, namely agricultural and food products. The data of 38 countries cover the period 1999–2015.
This paper investigates the long-run and short-run impacts of the exchange rate volatility on
Indonesia’s real exports to its major trading partners; Japan and US. The study uses monthly data from January 1998 to October 2015 in order to capture the structural break period of the Global Financial Crisis 2008. In addition, commodity price is included as an explanatory variable. The index of exchange rate volatility is generated using moving sample standard deviation of the growth of the real exchange rate. This paper estimates the long-run cointegration using Autoregressive Distributed Lag (ARDL) bounds testing, while for the short-run dynamic this paper use error-correction-model (ECM). The findings suggest rupiah volatility against the Japanese yen reduces Indonesia’s export to Japan, both in the short and the long-run. Fluctuation of rupiah against the US dollar helps Indonesia’s export to the US in the short run, but the impact is not carried out to the long-run. On the other hand, the impact of commodity price shock is negligible, except for the long-run export to Japan.
The aim of this paper is to provide further empirical evidence on the relation between exchange rate volatility, currency unions and trade. The novelties with respect to previous research are threefold. First, monthly trade and exchange rate data are used to take into account the short term effects of volatility on the bilateral exchange rate. Second, disaggregated trade data are used to deal with differences among industries and between final and intermediate goods. Finally, the existence of zero trade flows is taken into account by distinguishing between the extensive and the intensive margins of trade. Investigating the impact of exchange rate volatility and the Euro at the same time allows us to disentangle the effect of a common currency beyond the elimination of any variation in the exchange rate. Furthermore, the developments of the past years with the financial crisis and the EU enlargement to the East are taken into account, yielding additional findings and policy implications.
The purpose of this paper is to analyse the experience of crop yield insurance in Lithuanian agricultural sector against unfavourable climatic factors causing the losses of crop harvest and their impacts on the insurance premiums and the indemnity for damage. The huge problem of Lithuanian crop insurance system is the low rate of farmer’s participation and problems arising in defining insurance premiums. However, there are noticeable substantial climate changes during the last 20 years, and agricultural sector in future will be more affected by unfavourable climatic conditions and such natural disasters require the Government to provide assistance to farmers. The amount of insurance premiums for crop insurance are relatively high, because a single Insurance Company does not accumulated sufficient statistics, so farmers rarely use its services: now there are insured only 7% of insurable crop areas in Lithuania. Consequently, negotiating takes place between farmers, Insurance Company and Government concerning compensation for crop yield losses. The aim of paper is to analyze the advanced experience of other countries, to evaluate principles of crop insurance in order to give proposals for all negotiating parties. Methods of the investigation are comparative analysis of the problem, descriptive approach, synthesis, modeling. The results and conclusions of the paper suggest to modify the principles of crop insurance driving to „low-premium“, „wide coverage“ system, to increase the transparency of damage evaluation and payment of insurance claims and to be more focused on trends of climate change in future.
Exchange rate policies are an important economic policy in the Iraqi economy for its effects on most internal and external economic variables, including the stock market. The aim of this paper is to find out the relationship and orientation between the foreign exchange market and the stock market for the period 1/1/2005 to 30/6/2013, using monthly data for the exchange rate and the stock market index, by applying modern Econometric methods. The study found a long run relationship going from exchange market to Iraq stock exchange during the period stated.
The article is based on the literature review and tries to identify mechanisms which influence companies investment decisions related to export activity. Main potential channels were recognised. Firstly, new exporters’ channel - companies decide to start export activity thanks to lower transaction cost and reduction of exchange rate risk. Secondly, market coverage channel - existing exporters decide to increase foreign sales on existing markets or expand activity to a new markets. Thirdly, product variety channel - exporters introduce new or modified products. Fourthly, price discrimination channel - exporters have less incentives to differentiate prices on different markets. Fifthly, efficiency channel - more competition enforce companies to restructure their production and increase productivity.
Using a testable gravity-type bilateral trade model derived from an underlying demand and supply model, this paper explores the effects of exchange rate variations on bilateral trade in an exchange rate regime with a vehicle currency. The introduction of the vehicle currency allows us to figure out whether variations in the trade volume due to the fluctuation of the bilateral exchange rate are primarily due to changes in demand or in supply, or both. More specifically, in this theoretical framework, the appreciation of one country's currency against the vehicle currency is expected to promote its imports, but the effect of revaluation of the country's currency against the vehicle currency on its exports is ambiguous. Moreover, high volatility of the exchange rate of one country's currency against the vehicle currency is also expected to depress its import volume. From the empirical point of view, the decomposition of the bilateral exchange rate of two currencies into the bilateral rates of these two currencies against the vehicle currency provides a new alternative to avoid the econometric problem of potential reverse causality in assessing the effects. Through compiling a novel monthly bilateral trade dataset between China and Singapore over 21 years or 252 months, we empirically test the predictions of our model, which get robust support from the results.
This paper analyzes how the formation of global value chains (GVCs) has affected the exchange rate elasticity of exports. Using a panel framework covering 46 countries over the period 1996–2012, we first find some suggestive evidence that the elasticity of real manufacturing exports to the real effective exchange rate (REER) has decreased over time. We then examine whether the formation of supply chains has affected this elasticity using different measures of GVC integration. Intuitively, as countries are more integrated in global production processes, a currency depreciation only improves competitiveness of a fraction of the value of final good exports. In line with this intuition, we find evidence that GVC participation reduces the REER elasticity of manufacturing exports by 22 percent, on average.
This chapter deals with the evaluation of most crucial supply risks, which exist under real market conditions in the biomass market. General risk parameters and relevant indices along the biomass supply chain are discussed in detail. A modelling of 10-year-price variations based on the three investigated supply chains is followed and current 3-year-price volatilities are presented. Raw material prices, shipping rates, exchange rates, and the final market price turn out to be the main drivers for actual price variations and investment decisions. They can have a major impact on supply chain economics and investment success. Finally, responding hedging strategies for biomass supply chains and related investment decisions are summarised.
This paper attempts to evaluate the impact of generalized System of Preferences (GSP) scheme on exports of Nepal to the United States (US). Nepal-US trade is very crucial because the US is still the second largest export destination of Nepal. Thus, it is pertinent to study exports of Nepal to the US under GSP scheme. Empirical results show that impact of GSP scheme is very minimal and negative. Other factors than liberal policy viz. GSP determines exports of Nepal to the US. Weakening exports capacity and declining trade transaction of Nepal to the US is of major concern. In this regard, to sustain the export of existing but declining exportable items like garment, carpet, pashmina and handicrafts and development and promotion of GSP eligible new products and services will only be the resolution of this obstruction.Economic Journal of Development Issues Vol. 17 & 18 No. 1-2 (2014) Combined Issue, Page: 29-39
The primary objective of this chapter is to examine the role of the exchange rate in determining short- and long-run trade-balance behaviour for Colombia in a model which includes money and income. That is, the aim is to examine whether the trade balance is affected by the exchange rate, and whether hypotheses such as the Bickerdike, Robinson Metzler model (BRM), the Marshall-Lerner conditions, or J-curve type of hypotheses hold for current data. In addition, to test the empirical relevance of the absorption and monetary approaches for these data.
This paper analyzes the reaction of exporters to exchange rate changes. We present a model where, in the presence of distribution costs in the export market, high and low productivity firms react differently to a depreciation. Whereas high productivity firms optimally raise their markup rather than the volume they export, low productivity firms choose the opposite strategy. Hence, pricing to market is both endogenous and heterogenous. This heterogeneity has important consequences for the aggregate impact of exchange rate movements. The presence of fixed costs to export means that only high productivity firms can export, firms which precisely react to an exchange rate depreciation by increasing their export price rather than their sales. We show that this selection effect can explain the weak impact of exchange rate movements on aggregate export volumes. We then test the main predictions of the model on a very rich French firm level data set with destination-specific export values and volumes on the period 1995-2005. Our results confirm that high performance firms react to a depreciation by increasing their export price rather than their export volume. The reverse is true for low productivity exporters. Pricing to market by exporters is also more pervasive in sectors and destination countries with higher distribution costs. Consistent with our theoretical framework, we show that the probability of firms to enter the export market following a depreciation increases. The extensive margin response to exchange rate changes is modest at the aggregate level because firms that enter, following a depreciation, are smaller relative to existing firms.
The impact of the real exchange rate on growth is a controversial topic in developing countries. Depending on the initial conditions and the structural features of the economy under analysis, income growth can either accelerate or decelerate immediately after changes in the real exchange rate. A structuralist theoretical model and the evidence from Brazil (1996-2009) suggest that there exists an optimal-exchange rate level that maximizes growth. If there is also a positive relationship between real exchange rate and inflation, the optimal exchange rate for economic growth might not be compatible with the inflation target desired by the population. The main implication of the results presented in this paper is a defense of moderate exchange-rate fluctuation. This can be achieved through a policy of floating exchange rates in which the government has no compromise with a fixed value of the nominal or the real exchange rate, but it intervenes in the foreign exchange market to avoid an excessive volatility of the real exchange rate.
Trade deficits and surpluses are sometimes attributed to intentionally low or high exchange rate levels. The impact of exchange rate levels on trade has been much debated but the large body of existing empirical literature does not suggest an unequivocally clear picture of the trade impacts of changes in exchange rates. The impact of exchange rate volatility on trade also does not benefit from a clear theoretical cause-effect relationship. This study examines the impact of exchange rates and their volatility on trade flows in China, the Euro area and the United States in two broadly defined sectors, agriculture on the one hand and manufacturing and mining on the other. It finds that exchange volatility impacts trade flows only slightly. Exchange rate levels, on the other hand, affect trade in both agriculture and manufacturing and mining sectors but do not explain in their entirety the trade imbalances in the three countries examined.
There is good reason and much evidence to suggest that the real exchange rate matters for economic growth, but why? The "Washington Consensus" (WC) view holds that real exchange rate misalignment implies macroeconomic imbalances that are themselves bad for growth. In contrast, Rodrik (2008) argues that undervaluation relative to purchasing power parity is good for growth because it promotes the otherwise inefficiently small tradable sector. Our main result is that WC and the Rodrik views of the role of misalignment in growth are observationally equivalent for the main growth regressions he reports. There is an identification problem: Determinants of misalignment are also likely to be independent drivers of growth, and these types of growth regressions are hard-pressed to disentangle the different channels. However, we confirm that not only are overvaluations bad but undervaluations are also good for growth, a result squarely consistent with the Rodrik story but one that requires some gymnastics from the WC viewpoint.
The relationship between exchange-rate volatility and aggregate export volumes is examined using a model that includes real
export earnings of oil-exporting economies as a determinant of export volumes of a sample of 12 industrial countries. Four
fixed-coefficient panel-data estimation techniques, including a generalized method of moments (GMM) and random coefficient
(RC) estimation, are employed on panel data covering the estimation period 1977:1–2003:4 using three measures of exchange-rate
volatility. Our aim is to provide a theoretically and empirically justifiable specification that can guide researchers. In
contrast to recent studies employing panel data, we find little evidence that volatility has a negative and significant impact
on trade. We use second-generation RC estimation, which corrects for biases arising from incorrect functional forms, omitted
variables, and measurement errors. Our results suggest that the finding of a significant and negative impact of volatility
is attributable to specification biases.
By assuming real profit maximization, and uncertain prices as well as exchange rates, we conclude that it is uncertain percentage changes in the real exchange rate that are risky in international trade. Empirical estimation of fourteen bilateral trade flows among industrialized countries finds a significant negative effect on trade quantity from such risk in a number of these cases. The expectation variable has a positive effect in a larger number of cases. Significant price effects from the expectation variable are fewer and from risk are negligible.
The trade effects of exchange rate variability have been an issue in international economics for the past 30 years. The contribution of this article is to apply meta-regression analysis (MRA) to the empirical literature. On average, exchange rate variability exerts a negative effect on international trade. Yet MRA confirms the view that this result is highly conditional, by identifying factors that help to explain why estimated trade effects vary from significantly negative to significantly positive. MRA evidence on the pronounced heterogeneity of the empirical findings may be instructive for policy: first, by establishing that average trade effects are not sufficiently robust to generalize across countries; and second, by suggesting the importance of hedging opportunities - hence of financial development - for trade promotion. For the practice of MRA, we make a case for checking the robustness of results with respect to estimation technique, model specification and sample.
This paper examines firm entry and survival in exporting, and in products and markets not previously served by any domestic exporters. The authors use data on the nontraditional agriculture sector in Peru, which grew seven-fold from 1994 to 2007. They find tremendous firm entry and exit in the export sector, with exits more likely after one year and among firms that start small. There is also significant entry and exit in new markets. In contrast, such trial and error in new products is rare. New products are typically discovered by large experienced exporters and there is increased entry after products are discovered. The results imply that high sunk costs of entry are of concern for product discovery, especially for products that are not consumed domestically. In contrast, the tremendous entry and exit in exporting and in new markets suggests that initial sunk costs are relatively low. The authors develop a model that explains how entrepreneurs decide to export and to develop new export products and markets when there are sunk costs of discovery and uncertainty about idiosyncratic costs. The model explains many features of the data.
This paper examines the impact of exchange rate regimes on bilateral trade while differentiating the effects of "words" and "deeds". Our findings-based on an extended database for de jure and de facto exchange rate classifications-show that while fixed exchange rate regimes increase trade, there is no systematic difference in the effects of policy announcements versus actions to maintain exchange rate stability. The trade generating effect of more stable exchange rate regimes is however more pronounced when words and actions are aligned, both in the short and long-run. Policy credibility therefore plays an important role in determining the effects of de jure and de facto exchange rate arrangements such that deviations between the two could be costly. In addition, we find evidence that (i) the impact of hard pegs such as currency unions is broadly similar to that of conventional pegs; (ii) the currency union and direct peg effects evolve over time; and (iii) the effects of more stable regimes are heterogeneous across country groups.
Global and European trade balances have seen strong divergences combined with strong movements in the exchange rate. Trade balances and real effective exchange rates are related. Using different measures of the real effective exchange rate, we show that this long-run link hinges on the relative price of non-tradable to tradable goods and services in relation to their trading partners. An improvement in the trade balance is associated with a fall in the relative price of non-tradable goods and services. The elimination of nominal exchange rates with the euro does not change these relationships. Government consumption increases the relative price of nontradable goods. The results highlight the importance of internal price adjustments for external balances, a point frequently overlooked in policy debates.
This paper examines the impact of bilateral real exchange rate volatility on real exports of five emerging East Asian countries among themselves as well as to thirteen industrialised countries. We explicitly recognize the specificity of the exports between the emerging East Asian and industrialised countries and employ a generalized gravity model that combines a traditional long-run export demand model with gravity type variables. In the empirical analysis we use a panel comprising 25 years of quarterly data and perform unit-root and cointegration tests to verify the long-run relationship among the regression variables. The results provide strong evidence that exchange rate volatility has a negative impact on the exports of emerging East Asian countries. These results are robust across different estimation techniques and do not depend on the variable chosen to proxy exchange rate uncertainty.
The driving forces behind the Turkish export miracle, and in fact its very existence, have remained a matter of debate. The authors show there was a boom. As to contributing factor s, import growth in the Middle East in excess of import growth elsewher e made a negative contribution. On exports to non-oil countries, the authors show that earlier claims that their growth was an accounting artifact are incorrect. Moreover, the authors find that export subsidies were mostly shifted backwards into higher producer profits. The export boom was triggered by macroeconomic policies and trade reform that allowed a steady real depreciation of the Turkish lira. Copyright 1993 by MIT Press.
One of the issues that have received considerable attention in the comparison of the properties of alternative exchange rate regimes is the effect of exchange rate risk on the volume of trade. It has been argued that the higher volatility of exchange rates witnessed since the adoption of the floating regime in 1973 has led to a decrease in international trade transactions. This is because most trade contracts are not for immediate delivery of goods; and since they are denominated in terms of the currency of either the importer or the exporter, unanticipated fluctuations in the exchange rate affect realized profits and hence the volume of trade. It is implicitly assumed that forward exchange markets that can help traders eliminate this type of variations in profits either are not available (as it is true for the majority of currencies because most are not fully convertible, thereby impairing forward markets) or for some reason they are not utilized to fully hedge exchange risk present in trade transactions.' The empirical evidence, regarding the effect of exchange rate risk on trade, has at best been inconclusive. The large majority of the empirical studies are unable to establish a systematically significant link between exchange rate variability and the volume of international trade whether on an aggregate or on a bilateral basis. Abrams [1], Akhtar and Hilton [2], Cushman [4; 5; 6] and Kenan and Rodrik [12] find some significant negative effects of exchange volatility on exports. However, Bailey, Tavlas, and Uhlan [3], Hooper and Kohlhagen [10] and an International Monetary Fund Study [11] do not find any supporting evidence for the depressing effect of exchange rate volatility on international trade. It is also interesting to note that, in many of these studies, a significant positive effect of exchange rate volatility on the volume of trade is found for some cases. However, the positive effect, believed to be at odds with the theory was either ignored or dismissed as a perverse result, since "as far as volumes are concerned, theoretical considerations
I show that undervaluation of the currency (a high real exchange rate) stimulates economic growth. This is true particularly for developing countries. This finding is robust to using different measures of the real exchange rate and different estimation techniques. I also provide some evidence that the operative channel is the size of the tradable sector (especially industry). These results suggest that tradables suffer disproportionately from the government or market failures that keep poor countries from converging toward countries with higher incomes. I present two categories of explanations for why this may be so, the first focusing on institutional weaknesses, and the second on product-market failures. A formal model elucidates the linkages between the real exchange rate and the rate of economic growth.
I provide evidence that undervaluation (a high real exchange rate) stim- ulates economic growth. This is true particularly for developing countries, suggesting that tradable goods suer disproportionately from the distortions that keep poor countries from converging. I present two categories of expla- nations as to why this may be so, focusing on (a) institutional/contractual weaknesses, and (b) market failures. A formal model elucidates the linkages between the level of the real exchange rate and the rate of economic growth.
AbstractUS exports grew at 10.3% per year from 1987 to 1992, far faster than the economy as a whole. This paper examines sources of the manufacturing export boom, including entry, firm expansion, and export intensity. Most of the increase in exports came from increasing export intensity at existing exporters rather than from new entry into exporting. The small role of entry relative to export intensity offers support for the importance of sunk costs in the export market. Changes in exchange rates and rises in foreign income drove most of the export increase, while plant productivity increases played a smaller role.
The abstract for this document is available on CSA Illumina.To view the Abstract, click the Abstract button above the document title.
This paper investigates empirically the impact of exchange rate volatility on the trade flows of six countries over the quarterly period of 1980–2005. The impact of a volatility term on trade is examined by using an Engle-Granger residual-based cointegrating technique. The major results show that increases in the volatility of the real exchange rate, approximating exchange-rate uncertainty, exert a significant negative effect on trade for South Korea, Pakistan, Poland and South Africa and a positive effect for Turkey and Hungary in the long run.
A policy of managed real undervaluation may have been an important factor behind the success of East Asia’s export-led growth model. But current discussions over the value of China’s currency demonstrate the controversy this kind of policy can generate. Although a managed real undervaluation can enhance domestic competitiveness, it is difficult to sustain—both economically and politically—in the post-crisis environment. We show that a real undervaluation works only for low-income countries, and only in the medium term.
Currency unions Their dramatic effect on international trade
A gravity model is used to assess the separate effects of exchange rate volatility and currency unions on international trade. The panel data, bilateral observations for five years during 1970–90 covering 186 countries, includes 300+ observations in which both countries use the same currency. I find a large positive effect of a currency union on international trade, and a small negative effect of exchange rate volatility, even after controlling for a host of features, including the endogenous nature of the exchange rate regime. These effects, statistically significant, imply that two countries sharing the same currency trade three times as much as they would with different currencies. Currency unions like the European EMU may thus lead to a large increase in international trade, with all that that entails.
— Andrew Rose
The purpose of this note is to show that a positive effect of exchange rate volatility on export production has a theoretical basis. The key to this claim is that, as the exchange rate volatility increases, so does the value of the real option to export to the world market. Higher volatility increases the potential gains from trade. This may explain part of the mixed empirical findings regarding the effects of exchange rate risk on international trade.
The growth rate of international trade among industrial countries has declined by more than half since the inception of floating exchange rates. To explain the slowdown, the effects of exchange rate volatility are separated from those of other shocks since 1973--in particular, changes in oil prices and in trade regimes. The paper focuses on the effects of exchange rate variability with lags longer than a few months or quarters.
Previous research that investigated the impact of exchange rate volatility on the trade flows of Malaysia concentrated only on the aggregate exports of Malaysia to the rest of the world. In this paper we first concentrate on the trade flows between Malaysia and the U.S. After showing that exchange rate volatility has neither short-run nor long-run effect on the trade flows between the two countries, we disaggregate the trade data by industry and consider the experience of 101 U.S. exporting industries to Malaysia and 17 U.S. importing industries from Malaysia. While exchange rate volatility seems to have significant short-run effects on the trade flows of most industries, short-run effects translate into the long run only in a limited number of small industries.
The introduction of the euro generated substantial interest in measuring the impact of currency unions (CUs) on trade flows. Rose's (2000) initial estimates suggested a tripling of trade and created a literature in search of more reasonable CU effects. A recent meta-analysis of this literature shows that subsequent papers quantify CU trade impacts at 30-90 percent. However, most recent studies use shorter time series and fewer countries than Rose in his original work. We revisit Rose's original benchmark, extend the dataset, and address Baldwin's (2006) critiques regarding the proper specification of gravity models in large panels by simultaneously accounting for multilateral resistance and unobserved bilateral heterogeneity. This produces a robust average CU trade effect of 45 percent. Yet, the trade impacts of individual CUs vary substantially and are generally lower than those of preferential trade agreements (PTAs). Our revised benchmark can be used as a yardstick for future studies to delineate how estimates differ due to new data or differences in econometric specifications.
Since the Bretton Woods system of fixed exchange rates broke down in 1973, the resulting increase in exchange-rate variability has introduced uncertainty into trading relationships worldwide. Has this increased volatility had an effect on Japanese–U.S. trade? To answer this question, we apply cointegration analysis to disaggregated export and import data for 117 Japanese industries from 1973 to 2006. We find that in the long run, the trade shares of most industries are relatively unaffected by increased uncertainty, while other industries experience a relative increase or decrease in their proportion of overall trade. In the short run, some industries are influenced by exchange-rate volatility, but this effect is often ambiguous. Japanese exports of certain manufactures seem to improve in the long run relative to overall trade flows. J. Japanese Int. Economies22 (4) (2008) 518–534.
This paper presents a partial equilibrium model of the determination of domestic and export prices by a monopolistic competitive firm. The model stresses the role of exchange rate uncertainty and expectations. The most important result of the analysis is that the stochastic properties of deviations from the ‘law of one price’ are crucially affected by the currency of denomination of export prices. Using data on domestic and dollar export prices of Japanese goods, I find that deviations from the ‘law of one price’ are due to exchange rate surprises, but also to price staggering and ex ante price discrimination.
This paper analyzes export production in the presence of exchange rate uncertainty under mean-variance preferences. We present the elasticity of risk aversion, since this elasticity concept permits a distinct investigation of risk and expectation effects on exports. Counterintutitive results are possible, e.g. although the home currency is revaluating (devaluating), exports by the firm increase (decrease). This fact may contribute to the explanation of disturbing empirical results.
This paper deals with a long-standing puzzle: why are developing countries so reluctant to change their exchange rates when their currencies have become blatantly overvalued? The argument developed here is the following: under circumstances that are fairly common to real economies, a policy which deliberately maintains the exchange rate at a disequilibrium level can be welfare-increasing by promoting structural change. This can come via the presence of a systematic link between the real exchange rate and the manufacturing sector's terms of trade vis-à-vis agriculture. The paper considers a model in which there exists a relationship between these two due to technological factors. Using a two-period, two-sector general equilibrium model, it demonstrates that such a link provides authorities with a tool which can be manipulated to bring about industrial growth and increase welfare in the presence of unrealized learning-by-doing effects.
The new growth literature, using both endogenous growth and neoclassical models, has generated strong claims for the effect of national policies on economic growth. Empirical work on policies and growth has tended to confirm these claims. This paper casts doubt on this claim for strong effects of national policies, pointing out that such effects are inconsistent with several stylized facts and seem to depend on extreme observations in growth regressions. More modest effects of policy are consistent with theoretical models that feature substitutability between the formal and informal sector, have a large share for the informal sector, or stress technological change rather than factor accumulation.
In this paper we consider the impact of exchange rate volatility on the volume of bilateral US trade (both exports and imports) using sectoral data. Amongst the novelties in our approach are the use of sectoral industrial price indices, rather than an aggregate price index, and the construction of the sectoral groupings, which is based on economic and econometric criteria. We find that separating trade into differentiated goods and homogeneous goods results in the most appropriate sectoral division, and we also report evidence to suggest that exchange rate volatility has a robust and significantly negative effect across sectors, although it is strongest for exports of differentiated goods.
A classic argument for a fixed exchange rate is its promotion of trade. Empirical support for this, however, is mixed. While one branch of research consistently shows a small negative effect of exchange rate volatility on trade, another, more recent, branch presents evidence of a large positive impact of currency unions on trade. This paper helps resolve this disconnect. Our results, which use a new data-based classification of fixed exchange rate regimes, show a large, significant effect of a fixed exchange rate on bilateral trade between a base country and a country that pegs to it. These results suggest an economically relevant role for exchange rate regimes in trade determination since a significant amount of world trade is conducted between countries with fixed exchange rates.
What is the effect of nominal exchange rate variability on trade? I argue that the methods conventionally used to answer this perennial question are plagued by a variety of sources of systematic bias. I propose a novel approach that simultaneously addresses all of these biases, and present new estimates from a broad sample of countries from 1970 to 1997. The estimates indicate that nominal exchange rate variability has no significant impact on trade flows.
A puzzle in empirical international finance is the difficulty in finding a large and negative effect of exchange rate volatility on international trade. A common explanation is the availability of hedging instruments. This paper examines the empirical validity of this explanation using data on over 1000 country pairs. Which countries have currency hedging instruments is not perfectly observable. This paper deals with the problem by specifying an endogenous regime-switching regression. There are two main findings. First, there is no evidence in the data to support the validity of the hedging hypothesis. Second, for country pairs with large trade potential, exchange rate volatility deters goods trade to an extent much larger than that typically has been documented in the literature (without using the switching regression specification).
Using a regression analog of growth accounting, I present cross-sectional and panel regressions showing that growth is negatively associated with inflation, large budget deficits and distorted foreign exchange markets. Supplementary evidence suggests that the causation runs from macroeconomic policy to growth. The framework makes it possible to identify the channels of these effects: inflation reduces growth by reducing investment and productivity growth; budget deficits also reduce both capital accumulation and productivity growth. Examination of exceptional cases shows that while low inflation and small deficits are not necessary for high growth even over long periods, high inflation is not consistent with sustained growth.
By specifying a model of differential risk-bearing by import demand and export supply sides of the market for traded goods, the theoretical impact of exchange risk on both equilibrium prices and quantities is analyzed. For several empirical cases of 1965–1975 U.S. and German trade it is found that exchange rate uncertainty has had a significant impact on prices but no significant effect on the volume of trade. These price effects support previous survey results on the currency denomination of export contracts, namely that with the exception of some U.S. imports, most trade is largely denominated in the exporter's currency.
This study uses a GARCH (Generalized Autoregressive Conditional Heteroskedasticity) model to test if real exchange rate volatility has an adverse effect on the value of U.S. imports from Canada. We find that exchange rate uncertainty has a negative and statistically significant affect on trade flows.
During the last decades Norwegian exporters have-despite various forms of exchange rate targeting-faced a rather volatile exchange rate which may have influenced their behaviour. Recently, the shift to inflation targeting and a freely floating exchange rate has brought about an even more volatile exchange rate. We examine the causal link between export performance and exchange rate volatility across different monetary policy regimes within the cointegrated Vector Autoregression (VAR) framework using the implied conditional variance from a Generalized Autoregressive Conditional Heteroskedasticity (GARCH) model as a measure of volatility. Although treating the volatility measure as either a stationary or a nonstationary variable in the VAR, we are not able to find any evidence suggesting that export performance has been significantly affected by exchange rate uncertainty. We find, however, that volatility changes proxied by blip dummies related to the monetary policy change from a fixed to a managed floating exchange rate and the Asian financial crises during the 1990s enter significantly in a dynamic model for export growth-in which the level of relative prices and world market demand together with the level of exports constitute a significant cointegration relationship. A forecasting exercise on the dynamic model rejects the hypothesis that increased exchange rate volatility in the wake of inflation targeting in the monetary policy has had a significant impact on export performance.
We investigate the effects of exchange rate uncertainty on exports in the context of a multivariate framework in which a structural open economy vector autoregression is modified to accommodate multivariate GARCH-in-Mean errors, as detailed in Elder (Elder, J., 2004. Another perspective on the effects of inflation uncertainty. Journal of Money, Credit, and Banking 36, 912-928). Our measure of exchange rate uncertainty is the conditional standard deviation of the forecast error of the change in the exchange rate. We isolate the effects of exchange rate uncertainty on exports and also analyze how accounting for exchange rate uncertainty affects the response of exports to exchange rate shocks. We estimate the model using aggregate monthly data for the United States, over the flexible exchange rate period (since 1973). We use full information maximum likelihood estimation procedures and find that exchange rate uncertainty has a negative and significant effect on US exports. We also find that accounting for exchange rate uncertainty tends to strengthen the dynamic response of exports to shocks in the exchange rate and that exports respond asymmetrically to positive and negative exchange rate shocks of equal magnitude.
This paper shows that real exchange rate undervaluation through the accumulation of foreign reserves may improve welfare in economies with learning-by-investing externalities that arise disproportionately from the tradable sector. In the presence of targeting problems or when policy choices are restricted by multilateral agreements, first-best policies such as subsidies to capital accumulation, or subsidies to tradable production are not feasible. A neo-mercantilist policy of foreign reserve accumulation"outsources"the targeting problem or overcomes the multilateral restrictions by providing loans to foreigners that can only be used to buy up domestic tradable goods. This raises the relative price of tradable versus non-tradable goods (i.e. undervalues the real exchange rate) at the static cost of temporarily reducing tradable absorption in the domestic economy. However, since the tradable sector generates greater learning-by-investing externalities, it leads to dynamic gains in the form of higher growth. The net welfare effects of reserve accumulation depend on the balance between the static losses from lower tradable absorption versus the dynamic gains from higher growth.
An ambitious successor to W. Max Corden's highly acclaimed Inflation, Exchange Rates, and the World Economy, this book addresses topics in international macroeconomics that have come to the forefront of economic policy debates in recent years. Covering exchange rate policy, the European Monetary System, protection and competition, and the international "non-system" since the collapse of Bretton Woods, Corden provides a probing analysis of significant economic trends associated with the increasing integration of the world capital market. Beginning with essays on exchange rate policy, the current account, and external effects of fiscal policy, Corden lays out the foundations of balance-of-payments theory in relation to wage rates, income distribution, and inflation. Chapters on the European Monetary System focus on monetary integration and look skeptically at European proposals to move toward monetary union. Other topical essays discuss the "competitiveness" problem and the relation between protection and macroeconomic policy. Corden summarizes and clarifies a vast range of work on the coordination of macroeconomic policies and critically reviews various proposals for reforming the international monetary system.
A firm's entry and exit decisions when the output price follows a random walk are examined. An idle firm and an active firm are viewed as assets that are call options on each other. The solution is a pair of trigger prices for entry and exit. The entry trigger exceeds the variable cost plus the interest on the entry cost, and the exit trigger is less than the variable cost minus the interest on the exit cost. These gaps produce "hysteresis." Numerical solutions are obtained for several parameter values; hysteresis is found to be significant even with small sunk costs. Copyright 1989 by University of Chicago Press.
This paper discusses why previous literature has found little evidence of any effect of exchange rate variability on international trade. Methodological and statistical issues are discussed. In particular, comparisons are made of estimations based on different specifications or using different data sets and changes in the results depending on the method used are shown.
This paper proposes a sectoral theoretical model in an imperfect competition framework, with country-specific and industry-specific
original variables, notably factor productivity, scale economies, or product differentiation. It is then empirically estimated
in a panel data model, at a sectoral and geographical disaggregation level, to test the impact of exchange rate volatility
on G-7 countries' exports. Economies of scale are estimated from a non-linear translog production system. Two exchange rate
volatility measurements have been used: the moving sample standard deviation and the GARCH approach. The main finding shows
that the impact of exchange rate volatility on exports varies considerably, depending on the industry covered and the export
destination markets. As a consequence, there is both a sectoral and geographical aggregation bias when estimating the effects
of exchange rate variations. JEL no. F1, F12, F14
Exchange rate movements affect exports in two ways—rate depreciation and rate variability (risk). A depreciation raises exports, but the associated exchange rate risk could offset that positive effect. The present paper investigates the net effect for eight Asian countries using a dynamic conditional correlation bivariate GARCH-M model that simultaneously estimates time-varying correlation and exchange rate risk. Depreciation encourages exports, as expected, for most countries, but its contribution to export growth is weak. Exchange rate risk contributes to export growth in Malaysia and the Philippines, leading to positive net effects. Exchange rate risk generates a negative effect for six of the countries, resulting in a negative net effect in Indonesia, Japan, Singapore, and Taiwan and a zero net effect in Korea and Thailand.