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The Relationship between Exchange Rates and International Trade: A Literature Review

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  • Marc Auboin
  • Michele Ruta

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. The second issue involves exchange rate misalignments, which are predicted to have short-run effects in models with price rigidities. However, 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.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3868.

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Date of creation: 2012
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Handle: RePEc:ces:ceswps:_3868

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Keywords: exchange rates; volatility; misalignments; international trade flows;

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Cited by:
  1. Richard Pomfret & Victor Pontines, 2013. "Exchange Rate Policy and Regional Trade Agreements : A Case of Conflicted Interests?," Trade Working Papers 23713, East Asian Bureau of Economic Research.
  2. Juan Marchetti & Michele Ruta & Robert Teh, 2012. "Trade Imbalances and Multilateral Trade Cooperation," CESifo Working Paper Series 4050, CESifo Group Munich.
  3. Alessandro Nicita, 2013. "Exchange Rates, International Trade And Trade Policies," UNCTAD Blue Series Papers 56, United Nations Conference on Trade and Development.
  4. Richard Pomfret & Victor Pontines, 2013. "Exchange Rate Policy and Regional Trade Agreements : A Case of Conflicted Interests?," Finance Working Papers 23713, East Asian Bureau of Economic Research.
  5. Enzo Cassino & David Oxley, 2013. "How Does the Exchange Rate Affect the Real Economy? A Literature Survey," Treasury Working Paper Series 13/26, New Zealand Treasury.
  6. Muneesh Kapur & Rakesh Mohan, 2014. "India’s Recent Macroeconomic Performance: An Assessment and Way Forward," IMF Working Papers 14/68, International Monetary Fund.
  7. Pomfret, Richard & Pontines, Victor, 2013. "Exchange Rate Policy and Regional Trade Agreements: A Case of Conflicted Interests?," ADBI Working Papers 436, Asian Development Bank Institute.
  8. ANDO Mitsuyo & KIMURA Fukunari, 2013. "Trade Adjustments to Exchange Rate Changes by Japanese Manufacturing MNEs: Intra-firm and arm's length transactions," Discussion papers 13023, Research Institute of Economy, Trade and Industry (RIETI).

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