Exchange Rate Volatility and Trade: A Survey
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. La presente etude offre un panorama des recherches faites sur les liens qui existent entre la volatilite des taux de change et les echanges internationaux. L'auteure y examine d'une part les fondements theoriques des travaux effectues dans ce domaine et, d'autre part, les resultats des etudes empiriques publiees depuis 1988. Meme si la perception generale est que l'accroissement de la volatilite des taux de change abaisse le niveau des echanges commerciaux, la presente etude montre que les effets de la volatilite sont ambigus. Un veritable consensus ne se degage ni sur le sens ni sur l'importance des liens entre la volatilite des taux de change et les echanges commerciaux. Dans l'ensemble, parmi les etudes consultees, la majorite arrivent a la conclusion que la volatilite du cours de la monnaie tend a abaisser le niveau des echanges, mais lorsque l'effet est mesure, on constate qu'il est relativement mineur. La faiblesse de ce lien peut s'expliquer de plusieurs facons : i) un accroissement du risque n'entraine pas forcement une diminution des activites a risque meme pour les entreprises qui ont une aversion pour le risque; ii) les techniques de couverture permettent aux entreprises de reduire considerablement, a peu de frais, le risque de change; iii) la volatilite des taux de change peut en fait compenser d'autres types de risque; et iv) la volatilite des taux de change peut creer des conditions propices a des echanges commerciaux et a des investissements rentables.
|Date of creation:|
|Contact details of provider:|| Postal: 234 Wellington Street, Ottawa, Ontario, K1A 0G9, Canada|
Phone: 613 782-8845
Fax: 613 782-8874
Web page: http://www.bank-banque-canada.ca/
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.:
- Ethier, Wilfred, 1973. "International Trade and the Forward Exchange Market," American Economic Review, American Economic Association, vol. 63(3), pages 494-503, June.
- Martin J. Bailey & George S. Tavlas, 1988. "Trade and Investment under Floating Rates: The U.S. Experience," Cato Journal, Cato Journal, Cato Institute, vol. 8(2), pages 421-449, Fall.
- Peree, Eric & Steinherr, Alfred, 1989. "Exchange rate uncertainty and foreign trade," European Economic Review, Elsevier, vol. 33(6), pages 1241-1264, July.
- Baron, David P, 1976. "Fluctuating Exchange Rates and the Pricing of Exports," Economic Inquiry, Western Economic Association International, vol. 14(3), pages 425-438, September.
- Makin, John H, 1978. "Portfolio Theory and the Problem of Foreign Exchange Risk," Journal of Finance, American Finance Association, vol. 33(2), pages 517-534, May.
- Dixit, Avinash K, 1989.
"Entry and Exit Decisions under Uncertainty,"
Journal of Political Economy,
University of Chicago Press, vol. 97(3), pages 620-638, June.
- Dixit, A., 1988. "Entry And Exit Decisions Under Uncertainty," Papers 91, Princeton, Department of Economics - Financial Research Center.
- Andreas Savvides, 1992. "Unanticipated exchange rate variability and the growth of international trade," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 128(3), pages 446-463, September.
- Giovannini, Alberto, 1988. "Exchange rates and traded goods prices," Journal of International Economics, Elsevier, vol. 24(1-2), pages 45-68, February.
- 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.).
- 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;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 125(3), pages 588-618, September.
- 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.
- Baron, David P, 1976. "Flexible Exchange Rates, Forward Markets, and the Level of Trade," American Economic Review, American Economic Association, vol. 66(3), pages 253-266, June.
- Feenstra, R.C. & Kendall, J.D., 1991. "Exchange Rate Volatility and International Prices," Papers 377, California Davis - Institute of Governmental Affairs.
- Robert C. Feenstra & Jon D. Kendall, 1991. "Exchange Rate Volatility and International Prices," NBER Working Papers 3644, National Bureau of Economic Research, Inc.
- 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.
- 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.
- Vikram Kumar & Joseph A. Whitt, 1992. "Exchange rate variability and international trade," Economic Review, Federal Reserve Bank of Atlanta, issue May, pages 17-32.
- Belanger, Denis & Gutierrez, Sylvia & Racette, Daniel & Raynauld, Jacques, 1992. "The impact of exchange rate variability on trade flows: Further results on sectoral U.S. imports from Canada," The North American Journal of Economics and Finance, Elsevier, vol. 3(1), pages 61-82.
- 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-.
- 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.
- 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.
- Peter B. Clark, 1973. "Uncertainty, Exchange Risk, And The Level Of International Trade," Economic Inquiry, Western Economic Association International, vol. 11(3), pages 302-313, 09.
- 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 101-112, March.
- 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.
- 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 708-712, November.
- 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 459-468, June.
- 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.
- Joseph E. Gagnon, 1989. "Exchange rate variability and the level of international trade," International Finance Discussion Papers 369, Board of Governors of the Federal Reserve System (U.S.).
- 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.
- Viaene, J-M. & De Vries, C.G., 1989. "International Trade And Exchange Rate Volatility," Papers 8905, Erasmus University of Rotterdam - Institute for Economic Research.
- Brada, Josef C & Mendez, Jose, 1988. "Exchange Rate Risk, Exchange Rate Regime and the Volume of International Trade," Kyklos, Wiley Blackwell, vol. 41(2), pages 263-280.
- Paul De Grauwe & Guy Verfaille, 1988. "Exchange Rate Variability, Misalignment, and the European Monetary System," NBER Chapters,in: Misalignment of Exchange Rates: Effects on Trade and Industry, pages 77-104 National Bureau of Economic Research, Inc.
- Vikram Kumar, 1992. "Real effects of exchange risk on international trade," FRB Atlanta Working Paper 92-5, Federal Reserve Bank of Atlanta.
- Bleaney, Michael, 1992. "Comparisons of Real Exchange Rate Volatility across Exchange Rate Systems," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 54(4), pages 557-565, November.
- Paul De Grauwe, 1988. "Exchange Rate Variability and the Slowdown in Growth of International Trade," IMF Staff Papers, Palgrave Macmillan, vol. 35(1), pages 63-84, March.
- 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.
- Franke, Gunter, 1991. "Exchange rate volatility and international trading strategy," Journal of International Money and Finance, Elsevier, vol. 10(2), pages 292-307, June.
- 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.
- 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.
- 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. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:bca:bocawp:94-5. 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: ()
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.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with 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 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.