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The Effect of Exchange Rate Volatility on International Trade: The Implication for Production Networks in East Asia

Author

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  • Hayakawa, Kazunobu
  • Kimura, Fukunari

Abstract

This paper is an empirical investigation of the relationship between exchange rate volatility and international trade, focusing on East Asia. It finds that intra-East Asian trade is discouraged by exchange rate volatility more seriously than trade in other regions because intermediate goods trade in production networks, which is quite sensitive to exchange rate volatility compared with other types of trade, occupies a significant fraction of trade. In addition, this negative effect of volatility is mainly induced by the unanticipated volatility and has an even greater impact than that of tariffs.

Suggested Citation

  • Hayakawa, Kazunobu & Kimura, Fukunari, 2008. "The Effect of Exchange Rate Volatility on International Trade: The Implication for Production Networks in East Asia," IDE Discussion Papers 156, Institute of Developing Economies, Japan External Trade Organization(JETRO).
    • Handle: RePEc:jet:dpaper:dpaper156
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    File URL: https://ir.ide.go.jp/?action=repository_action_common_download&item_id=38011&item_no=1&attribute_id=22&file_no=1
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    References listed on IDEAS

    as
    1. Mr. Peter B. Clark & Shang-Jin Wei & Ms. Natalia T. Tamirisa & Mr. Azim M Sadikov & Mr. Li Zeng, 2004. "A New Look at Exchange Rate Volatility and Trade Flows," IMF Occasional Papers 2004/009, International Monetary Fund.
    2. Mitsuyo Ando & Fukunari Kimura, 2005. "The Formation of International Production and Distribution Networks in East Asia," NBER Chapters, in: International Trade in East Asia, pages 177-216, National Bureau of Economic Research, Inc.
    3. Ito, Takatoshi & Rose, Andrew K. (ed.), 2005. "International Trade in East Asia," National Bureau of Economic Research Books, University of Chicago Press, number 9780226378961, December.
    4. Michael D. McKenzie, 1999. "The Impact of Exchange Rate Volatility on International Trade Flows," Journal of Economic Surveys, Wiley Blackwell, vol. 13(1), pages 71-106, February.
    5. Kozo Kiyota & Shujiro Urata, 2004. "Exchange Rate, Exchange Rate Volatility and Foreign Direct Investment," The World Economy, Wiley Blackwell, vol. 27(10), pages 1501-1536, November.
    6. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November.
    7. Takatoshi Ito & Andrew K. Rose, 2005. "International Trade in East Asia," NBER Books, National Bureau of Economic Research, Inc, number ito_05-1, March.
    8. ITO Takatoshi & KOIBUCHI Satoshi & SASAKI Yuri & SATO Kiyotaka & SHIMIZU Junko & HAYAKAWA Kazunobu & YOSHIMI Taiyo, 2008. "Currency Invoicing and Foreign Exchange Risk Management: A Case Study of Japanese Firms (Japanese)," Discussion Papers (Japanese) 08009, Research Institute of Economy, Trade and Industry (RIETI).
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Masahiro Kawai & Shinji Takagi, 2012. "A Proposal for Exchange Rate Policy Coordination in East Asia," Chapters, in: Masahiro Kawai & Peter J. Morgan & Shinji Takagi (ed.), Monetary and Currency Policy Management in Asia, chapter 9, Edward Elgar Publishing.
    2. Masahiro Kawai & Peter J. Morgan & Shinji Takagi (ed.), 2012. "Monetary and Currency Policy Management in Asia," Books, Edward Elgar Publishing, number 14414.
    3. Kiki Verico & Yeremia Natanael, 2018. "Let’s talk about the Free Trade Agreement (FTA): The five ASEAN members highlighting Indonesia," LPEM FEBUI Working Papers 201823, LPEM, Faculty of Economics and Business, University of Indonesia, revised Jul 2018.
    4. Verico, Kiki & Natanael, Yeremia, 2018. "Let’s talk about the Free Trade Agreement (FTA): The five ASEAN members highlighting Indonesia," MPRA Paper 87947, University Library of Munich, Germany.
    5. Imam Mukhlis, 2010. "Impact of volatility exchange rates on Indonesian electronic imports from intra and extra ASEAN," Economic Journal of Emerging Markets, Universitas Islam Indonesia, vol. 2(1), pages 61-78, April.
    6. Abdul Jalil Khan & Parvez Azim & Shabib Haider Syed, 2014. "The Impact of Exchange Rate Volatility on Trade: A Panel Study on Pakistan’s Trading Partners," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 19(1), pages 31-66, Jan-June.
    7. Ulrich Volz, 2014. "RMB Internationalisation and Currency Cooperation in East Asia," Financial and Monetary Policy Studies, in: Frank Rövekamp & Hanns Günther Hilpert (ed.), Currency Cooperation in East Asia, edition 127, pages 57-81, Springer.

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    More about this item

    Keywords

    Exchange rate volatility; Trade; East Asia; International trade; Foreign exchange; 為替変動; 貿易; 東アジア; 外国為替;
    All these keywords.

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • N75 - Economic History - - Economic History: Transport, International and Domestic Trade, Energy, and Other Services - - - Asia including Middle East

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