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Does Trade Freedom Affect Exchange Rate Movement? A perspective of High-Technology Trade

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  • Cong, Shufeng
  • Chin, Lee
  • Kumarusamy, Risidaxshinni

Abstract

Changes in the degree of trade freedom influence economic development and foreign investment, which in turn, affect currency values and exchange rate movements. Therefore, this study examined the direct and indirect impacts of trade freedom on exchange rate movement in emerging, developing, and developed economies. Empirical tests conducted using panel data from 75 countries revealed that trade freedom has a nonlinear U-shaped relationship with exchange rate movement, which is positively moderated by high-technology trade and foreign direct investment. Additionally, the results of heterogeneity analysis showed that trade freedom has a linear positive impact on the exchange rate movement of developed economies but a U-shaped impact on emerging and developing economies, with a stronger impact on emerging economies. The findings of this study provide valuable insights for governments to strike a balance between promoting trade freedom and maintaining currency exchange rate stability.

Suggested Citation

  • Cong, Shufeng & Chin, Lee & Kumarusamy, Risidaxshinni, 2024. "Does Trade Freedom Affect Exchange Rate Movement? A perspective of High-Technology Trade," MPRA Paper 126888, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:126888
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    1. Avni H. Alidemaj & Anatoljis Krivins & Esat Durguti & John McArdle, 2025. "Economic Freedom Index and Foreign Direct Investment: Bridging the Gap between Developed and Emerging Economies," Central European Business Review, Prague University of Economics and Business, vol. 2025(5), pages 1-22.
    2. Yan, Xianglin & Piao, Longguo, 2025. "The effect of global geopolitical risks on trade openness," International Review of Economics & Finance, Elsevier, vol. 102(C).

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    JEL classification:

    • F19 - International Economics - - Trade - - - Other
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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