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Exchange Rates, International Trade And Trade Policies

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  • Alessandro Nicita

Abstract

The exchange rate plays an important role in a country’s trade performance. Whether determined by exogenous shocks or by policy, the relative valuations of currencies and their volatility often have important repercussions on international trade, the balance of payments and overall economic performance. This paper investigates the importance of exchange rates on international trade by analysing the impact that exchange rate volatility and misalignment have on trade and then by exploring whether exchange rate misalignments affect governments’ decisions regarding trade policies. The methodology consists of estimating fixed effects models on a detailed panel dataset comprising about 100 countries and covering 10 years (2000-2009). The findings of this study are generally in line with those of the recent literature in supporting the importance of exchange rate misalignment while disregarding that of exchange rate volatility. In magnitude, exchange rate misalignments result in trade diversion quantifiable in about one per cent of world trade. This paper also shows evidence supporting the argument that trade policy is used to compensate for some of the consequences of an overvalued currency, especially with regard to anti-dumping interventions. The findings of this research carry three broad policy implications. First, policymakers need to pay attention to the exchange rates of their countries and those of other countries as the effect of currency misalignments on international trade is considerable. Second, the relative valuation of currencies can explain only a small part of global trade imbalances. Adjustments in exchange rates can be only part of the solution for global rebalancing and need to be accompanied by other policy actions. Finally, strategies to avoid the resurgence of protectionist measures should include multilateral cooperation related to the stabilization of exchange rates towards their equilibrium level.

Suggested Citation

  • Alessandro Nicita, 2013. "Exchange Rates, International Trade And Trade Policies," UNCTAD Blue Series Papers 56, United Nations Conference on Trade and Development.
  • Handle: RePEc:unc:blupap:56
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    Cited by:

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    3. Ely Susanti & Maimun Sholeh, 2020. "Indonesia Economic Growth Determinant: The Impact of Macro Economic Variables and International Trade," International Journal of Economics and Financial Issues, Econjournals, vol. 10(5), pages 70-76.
    4. Selena Begović & Sead Kreso, 2017. "The adverse effect of real effective exchange ratechange on trade balance in European transition countries," Zbornik radova Ekonomskog fakulteta u Rijeci/Proceedings of Rijeka Faculty of Economics, University of Rijeka, Faculty of Economics, vol. 35(1), pages 277-299.
    5. Dosse Toulaboe, 2017. "Real exchange rate misalignment of Asian currencies," Asian-Pacific Economic Literature, Asia Pacific School of Economics and Government, The Australian National University, vol. 31(1), pages 39-52, May.
    6. Gor A. Khachatryan & Aleksandr Grigoryan, 2020. "Export Growth Dynamics and Real Exchange Rate: Evidence from Armenia," International Economic Journal, Taylor & Francis Journals, vol. 34(3), pages 493-509, July.
    7. Kang, Jong Woo, 2016. "International Trade and Exchange Rate," ADB Economics Working Paper Series 498, Asian Development Bank.
    8. Simbarashe Mhaka & Leward Jeke, 2018. "A comparative analysis of the determinants of South African bilateral trade flows with the European Union-Southern African Development Community economic partnership agreement and trade development an," Working Papers 1836, Department of Economics, Nelson Mandela University, revised Dec 2018.
    9. Arif, Rabia & Jamil, Nida, 2018. "Proposed Methodology for Strategic Trade Policy to Achieve High Value Added Exports: A Case of Pakistan’s Textile Sector," MPRA Paper 90380, University Library of Munich, Germany.
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    12. Adedayo Emmanuel Longe & Folake Adenola & Adewale Musliudeen Balogun & Shehu Muhammad, 2019. "Asymmetric and Non-Asymmetric Impact of Real Effective Exchange Rate on Trade in Nigeria," Izvestiya, Varna University of Economics, issue 4, pages 259-274.

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    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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