Exchange rate effects on the volume and variability of trade flows

Abstract

This paper investigates the effects of exchange rate uncertainty on the volume and variability of trade flows. Employing a signal extraction framework, we show t h a t the direction and magnitude of importers' and exporters' optimal trading activities depend upon the source of the uncertainty (general microstructure shocks, fundamental factors driving the exchange rate process, or a noisy signal of policy innovations), providing a rationale for the contradictory empirical evidence in the literature. W e also show that exchange rate uncertainty emanating from general microstructure shocks and the fundamental factors reduces the variability of trade flows, while that related to a noisy signal of policy innovations increases variability.

Exchange-rate volatility in Latin America and its impact on foreign trade

“…Chowdhury (1993), Arize (1995), and Choudhry (2001) report a negative impact, while Qian and Varangis (1994) and Baum et al (2002) find a negative effect for some countries and a positive for others. Doyle (2001) finds that in the case of Irish-UK trade positive effects predominate.…”

“…Coes (1981) uses a log-level specification to examine Brazilian exports 1 Empirical papers on the issue include, among many others, Kenen and Rodrik(1986), Cushman(1988), Qian and Varangis (1994), Lee(1999), Doyle(2001), and Baum et al (2002), while examples of theoretical contributions are Ethier (1973), Hooper andKohlhagen (1978), De Grauwe (1988), Baldwin and Krugman (1989), Viane and de Vries (1992), and Barkoulas et al (2002). Surveys of the literature can be found in Côté (1994) and McKenzie (1999).…”

The Impact of Exchange Rate Fluctuation on the Nigerian Economic Growth: an Empirical Investigation

“…4, No. 8 ISSN: 2222 227 www.hrmars.com Barkoulas et al (2002) examined the impact of exchange rate fluctuation on the volume and variability of trade flows. They concluded that, exchange rate volatility discourages expansion of the volume of trade thereby reducing its benefits.…”

How the Export Volume Is Affected by Determinant Factors in a Developing Country?

“…Interestingly, there are also some studies that stay in the middle and propose an ambiguous impact of the exchange rate volatility on trade (e.g. Viaene & De Vries, 1992;Barkoulas et al, 2002) due to several reasons such as type of shocks on exporters.…”