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Currency derivatives and the disconnection between exchange rate volatility and international trade

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  • Bas Straathof

    ()

  • Paolo Calio

    ()

Abstract

Exchange rate risk will only have a small effect on international transactions as long as this risk is easily tradable. We find evidence indicating that the availability of currency futures can explain the relatively small impact of exchange rate volatility on trade. The impact of exchange rate volatility on international trade is small for industrialized countries, especially since the late 1980s. An explanation for this is Wei’s (1999) “hedging hypothesis”, which states that the availability of currency derivatives has changed the relation between exchange rate volatility and trade. Exchange rate risk will only have a small effect on international transactions as long as this risk is easily tradable. We find evidence indicating that the availability of currency futures can explain the relatively small impact of exchange rate volatility on trade.  

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Bibliographic Info

Paper provided by CPB Netherlands Bureau for Economic Policy Analysis in its series CPB Discussion Paper with number 203.

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Date of creation: Feb 2012
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Handle: RePEc:cpb:discus:203

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  1. Richard Baldwin Virginia Di Nino, 2006. "Euros and zeros: The common currency effect on trade in new goods," IHEID Working Papers, Economics Section, The Graduate Institute of International Studies 21-2006, Economics Section, The Graduate Institute of International Studies, revised 31 Oct 2006.
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  4. Beetsma, Roel & Giuliodori, Massimo, 2009. "The Macroeconomic Costs and Benefits of the EMU and other Monetary Unions: An Overview of Recent Research," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7500, C.E.P.R. Discussion Papers.
  5. Philippe Aghion & Philippe Bacchetta & Romain Ranciere & Kenneth Rogoff, 2006. "Exchange Rate Volatility and Productivity Growth: The Role of Financial Development," Working Papers 06.02, Swiss National Bank, Study Center Gerzensee.
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  7. Jeffrey A. Frankel and Shang-Jin Wei., 1993. "Emerging Currency Blocs," Center for International and Development Economics Research (CIDER) Working Papers, University of California at Berkeley C93-026, University of California at Berkeley.
  8. Scott L. Baier & Jeffrey H. Bergstrand, 2005. "Do free trade agreements actually increase members’ international trade?," Working Paper, Federal Reserve Bank of Atlanta 2005-03, Federal Reserve Bank of Atlanta.
  9. Chowdhury, Abdur R, 1993. "Does Exchange Rate Volatility Depress Trade Flows? Evidence from Error-Correction Models," The Review of Economics and Statistics, MIT Press, vol. 75(4), pages 700-706, November.
  10. Andrew K. Rose, 2000. "One money, one market: the effect of common currencies on trade," Economic Policy, CEPR;CES;MSH, CEPR;CES;MSH, vol. 15(30), pages 7-46, 04.
  11. Maurice J. G. Bun & Franc J. G. M. Klaassen, 2007. "The Euro Effect on Trade is not as Large as Commonly Thought," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, Department of Economics, University of Oxford, vol. 69(4), pages 473-496, 08.
  12. Alexandra Hudson & Bas Straathof, 2010. "The Declining Impact of Exchange Rate Volatility on Trade," De Economist, Springer, Springer, vol. 158(4), pages 361-372, November.
  13. Rose, Andrew K, 2010. "Exchange Rate Regimes in the Modern Era: Fixed, Floating, and Flaky," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7987, C.E.P.R. Discussion Papers.
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