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Exchange Rate Volatility and Trade

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Author Info
Agathe Cote (Bank of Canada)
Abstract

This paper provides an extensive survey of the literature on exchange rate volatility and trade, examining both the theory that underlies the work in this area and the results of empirical studies published since 1988. Despite the widespread view that an increase in volatility will reduce the level of trade, this review reveals that the effects of volatility are ambiguous. There is no real consensus on either the direction or the size of the exchange rate volatility - trade level relationship. Overall, a larger number of studies find that volatility tends to reduce the level of trade, but when the effect is measured, it is found to be relatively small. Several reasons can explain this tenuous relationship: (i) even for risk-averse businesses, an increase in risk does not necessarily lead to a reduction in the risky activity, (ii) the availability of hedging techniques makes it possible for traders to avoid most of exchange risk at little cost, (iii) exchange rate volatility may actually offset some other forms of business risk, and (iv) exchange rate volatility can create profitable trading and investment opportunities.

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Paper provided by EconWPA in its series International Trade with number 9406001.

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Length: 37 pages
Date of creation: 23 Jun 1994
Date of revision: 23 Jun 1994
Handle: RePEc:wpa:wuwpit:9406001

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Find related papers by JEL classification:
F1 - International Economics - - Trade
F2 - International Economics - - International Factor Movements and International Business

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Koray, Faik & Lastrapes, William D, 1989. "Real Exchange Rate Volatility and U.S. Bilateral Trade: A VAR Approach," The Review of Economics and Statistics, MIT Press, vol. 71(4), pages 708-12, November. [Downloadable!] (restricted)
  2. Ethier, Wilfred, 1973. "International Trade and the Forward Exchange Market," American Economic Review, American Economic Association, vol. 63(3), pages 494-503, June. [Downloadable!] (restricted)
  3. Eldor, Rafael & Zilcha, Itzhak, 1987. "Discriminating Monopoly, Forward Markets and International Trade," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(2), pages 459-68, June. [Downloadable!] (restricted)
  4. Anderson, Margot & Grier, David Alan, 1992. "Robust, Non-parametric Measures of Exchange Rate Variability," Applied Economics, Taylor and Francis Journals, vol. 24(9), pages 951-58, September.
  5. Peree, Eric & Steinherr, Alfred, 1989. "Exchange rate uncertainty and foreign trade," European Economic Review, Elsevier, vol. 33(6), pages 1241-1264, July. [Downloadable!] (restricted)
  6. Baron, David P, 1976. "Fluctuating Exchange Rates and the Pricing of Exports," Economic Inquiry, Oxford University Press, vol. 14(3), pages 425-38, September.
  7. Makin, John H, 1978. "Portfolio Theory and the Problem of Foreign Exchange Risk," Journal of Finance, American Finance Association, vol. 33(2), pages 517-34, May. [Downloadable!] (restricted)
  8. Gagnon, Joseph E., 1993. "Exchange rate variability and the level of international trade," Journal of International Economics, Elsevier, vol. 34(3-4), pages 269-287, May. [Downloadable!] (restricted)
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  9. Dixit, Avinash K, 1989. "Entry and Exit Decisions under Uncertainty," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 620-38, June. [Downloadable!] (restricted)
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  10. Viaene, Jean-Marie & de Vries, Casper G., 1992. "International trade and exchange rate volatility," European Economic Review, Elsevier, vol. 36(6), pages 1311-1321, August. [Downloadable!] (restricted)
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  11. Andreas Savvides, 1992. "Unanticipated exchange rate variability and the growth of international trade," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 128(3), pages 446-463, September. [Downloadable!] (restricted)
  12. Brada, Josef C & Mendez, Jose, 1988. "Exchange Rate Risk, Exchange Rate Regime and the Volume of International Trade," Kyklos, Blackwell Publishing, vol. 41(2), pages 263-80.
  13. Giovannini, Alberto, 1988. "Exchange rates and traded goods prices," Journal of International Economics, Elsevier, vol. 24(1-2), pages 45-68, February. [Downloadable!] (restricted)
  14. Victoria S. Farrell & Dean A. DeRosa & T. Ashby McCown, 1983. "Effects of exchange rate variability on international trade and other economic variables : a review of the literature," Staff Studies 130, Board of Governors of the Federal Reserve System (U.S.).
  15. Catherine Mann, 1989. "The effects of exchange rate trends and volatility on export prices: Industry examples from Japan, Germany, and the United States," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 125(3), pages 588-618, September. [Downloadable!] (restricted)
  16. Pagan, Adrian & Ullah, Aman, 1988. "The Econometric Analysis of Models with Risk Terms," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 3(2), pages 87-105, April. [Downloadable!] (restricted)
  17. Baron, David P, 1976. "Flexible Exchange Rates, Forward Markets, and the Level of Trade," American Economic Review, American Economic Association, vol. 66(3), pages 253-66, June. [Downloadable!] (restricted)
  18. Paul De Grauwe & Guy Verfaille, 1988. "Exchange Rate Variability, Misalignment, and the European Monetary System," NBER Chapters, in: Misalignment of Exchange Rates, pages 77-104 National Bureau of Economic Research, Inc. [Downloadable!]
  19. Vikram Kumar, 1992. "Real effects of exchange risk on international trade," Working Paper 92-5, Federal Reserve Bank of Atlanta.
  20. Robert C. Feenstra & Jon D. Kendall, 1991. "Exchange Rate Volatility and International Prices," NBER Working Papers 3644, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  21. Kawai, Masahiro & Zilcha, Itzhak, 1986. "International trade with forward-futures markets under exchange rate and price uncertainty," Journal of International Economics, Elsevier, vol. 20(1-2), pages 83-98, February. [Downloadable!] (restricted)
  22. O. Cushman, David, 1986. "Has exchange risk depressed international trade? The impact of third-country exchange risk," Journal of International Money and Finance, Elsevier, vol. 5(3), pages 361-379, September. [Downloadable!] (restricted)
  23. Vikram Kumar & Joseph A. Whitt, Jr., 1992. "Exchange rate variability and international trade," Economic Review, Federal Reserve Bank of Atlanta, issue May, pages 17-32.
  24. Asseery, A. & Peel, D. A., 1991. "The effects of exchange rate volatility on exports : Some new estimates," Economics Letters, Elsevier, vol. 37(2), pages 173-177, October. [Downloadable!] (restricted)
  25. Viaene, J.M. & Vries De, C.G., 1987. "Exchange Rate Volatility and International Trade," Cahiers de recherche 8743, Universite de Montreal, Departement de sciences economiques.
  26. Franke, Gunter, 1991. "Exchange rate volatility and international trading strategy," Journal of International Money and Finance, Elsevier, vol. 10(2), pages 292-307, June. [Downloadable!] (restricted)
  27. Hooper, Peter & Kohlhagen, Steven W., 1978. "The effect of exchange rate uncertainty on the prices and volume of international trade," Journal of International Economics, Elsevier, vol. 8(4), pages 483-511, November. [Downloadable!] (restricted)
  28. Bini-Smaghi, Lorenzo, 1991. "Exchange Rate Variability and Trade: Why Is It So Difficult to Find Any Empirical Relationship?," Applied Economics, Taylor and Francis Journals, vol. 23(5), pages 927-35, May.
  29. Cushman, David O., 1983. "The effects of real exchange rate risk on international trade," Journal of International Economics, Elsevier, vol. 15(1-2), pages 45-63, August. [Downloadable!] (restricted)
  30. Willett:, Thomas D., 1986. "Exchange-rate volatility, international trade, and resource allocation: A perspective on recent research," Journal of International Money and Finance, Elsevier, vol. 5(1, Supple), pages S101-S112, March. [Downloadable!] (restricted)
  31. Kroner, Kenneth F. & Lastrapes, William D., 1993. "The impact of exchange rate volatility on international trade: Reduced form estimates using the GARCH-in-mean model," Journal of International Money and Finance, Elsevier, vol. 12(3), pages 298-318, June. [Downloadable!] (restricted)
  32. Sercu, Piet & Vanhulle, Cynthia, 1992. "Exchange rate volatility, international trade, and the value of exporting firms," Journal of Banking & Finance, Elsevier, vol. 16(1), pages 155-182, February. [Downloadable!] (restricted)
  33. Belanger, D. & Gutierrez, S. & Racette, D. & Raynauld, J., 1990. "The Impact Of Exchange Rate Variability On Trade Flows: Further Results On Sectoral U.S. Imports From Canada," Papers 90-08, ECOLE DES HAUTES ETUDES COMMERCIALES (H.E.C.), MONTREAL-.
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  34. Lastrapes, William D. & Koray, Faik, 1990. "Exchange rate volatility and U.S. multilateral trade flows," Journal of Macroeconomics, Elsevier, vol. 12(3), pages 341-362. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Sarah Guillou, 2008. "Exports and exchange rate : a firm-level investigation," Documents de Travail de l'OFCE 2008-02, Observatoire Francais des Conjonctures Economiques (OFCE). [Downloadable!]
  2. Petar Soric, 2007. "The Impact of Kuna Exchange Rate Volatility on Croatian Exports," Financial Theory and Practice, Institute of Public Finance, vol. 31(4), pages 353-369. [Downloadable!]
  3. Alexander Mihailov, 2003. "Effects of the Exchange-Rate Regime on Trade under Monetary Uncertainty: The Role of Price Setting," Economics Discussion Papers 566, University of Essex, Department of Economics. [Downloadable!]
  4. Tommaso Mancini Griffoli, 2006. "Explaining the Euro's Effect on Trade? Interest Rates in an Augmented Gravity Equation," HEI Working Papers 10-2006, Economics Section, The Graduate Institute of International Studies. [Downloadable!]
  5. Arief Bustaman & Kankesu Jayanthakumaran, 2006. "The Impact of Exchange Rate Volatility on Indonesia’s Exports to the USA: An Application of ARDL Bounds Testing Procedure," Working Papers in Economics and Development Studies (WoPEDS) 200610, Department of Economics, Padjadjaran University, revised Dec 2006. [Downloadable!]
  6. Jean IMBS, 1998. "Fluctuations, Bilateral Trade and the Exchange Rate Regime," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 9906, Université de Lausanne, Faculté des HEC, DEEP, revised Nov 1998. [Downloadable!]
  7. Jens, EISENSCHMIDT & Klaus, WAELDE, 2003. "International Trade, Hedging and the Demand for Forward Contracts," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2003022, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES). [Downloadable!]
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