IDEAS home Printed from
   My bibliography  Save this article

Does International Trade Stabilize Exchange Rate Volatility?


  • Tseng, Hui-Kuan

    () (Department of Economics, University of North Carolina at Charlotte)


Ever since the early 1980s, major industrial countries have been suffering from severe multi-lateral trade imbalances, accompanied by tremendously volatile exchange rates. This paper examines the relationship between trade balance and exchange rate volatility. A stochastic macroeconomic model with sticky prices is developed. Our comparative statics and numerical simulation results indicate that an increased trade balance (relative to domestic aggregate demand) tends to reduce exchange rate volatility when the domestic absorption shock disturbs the economy. In the presence of all other domestic and foreign shocks, however, an increased trade balance tends to augment exchange-rate volatility, except for the case of a disturbance in domestic real income in which the effect of an increased trade balance is indeterminate. Our results suggest that whether trade imbalance has aggravated exchange rate volatility in many industrial countries is an open question, which needs to be solved through more empirical investigations.

Suggested Citation

  • Tseng, Hui-Kuan, 2007. "Does International Trade Stabilize Exchange Rate Volatility?," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 60(2), pages 231-248.
  • Handle: RePEc:ris:ecoint:0061

    Download full text from publisher

    File URL:
    File Function: Full text
    Download Restriction: no

    More about this item


    Trade Imbalance; Exchange Rate Volatility; Stochastic Macroeconomic Model;

    JEL classification:

    • F17 - International Economics - - Trade - - - Trade Forecasting and Simulation
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation: Models and Applications


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ris:ecoint:0061. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Angela Procopio). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.