The relationship between exchange rates and international trade: a literature review

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. This paper surveys a wide body of economic literature on the relationship between currencies and trade. Specifically, two main issues are investigated: the impact on international trade of exchange rate volatility and of currency misalignments. On average, exchange rate volatility has a negative (even if not large) impact on trade flows. The extent of this effect depends on a number of factors, including the existence of hedging instruments, the structure of production (e.g. the prevalence of small firms), and the degree of economic integration across countries. The second issue involves exchange rate misalignments, which are predicted to have shortrun effects in models with price rigidities. However, the exact impact depends on a number of features, such as the pricing strategy of firms engaging in international trade and the importance of global production networks. This effect is predicted to disappear in the longrun, unless some other distortion characterizes the economy. Empirical results confirm that short-run effects can exist, but their size and persistence over time are not consistent across different studies. Terms of use: Documents inJEL-Code: F100, F310, F550.

The effect of the exchange rate on industry-level trade flows in Czechia

“…This paved the way to more sophisticated models with a multi-country and multi-currency environment and diversifi ed fi rms, in which the relationship between exchange rates, the supply of goods, and the decision to trade became more ambiguous [4]. Some models introduced in the late 1980s and early 1990s focus on hysteresis in global trade and come to the conclusion that the high volatility of exchange rates and the related uncertainty can contribute to the decision to enter or exit international trade in the presence of sunk costs.…”

“…They argue that if changes in the exchange rate are unpredictable, it indicates uncertainty about companies' profi ts and reduces the benefi ts of international trades. Hence, the main target of attention was the channel through which the uncertainty generated by short-run and long-run volatility is transmitted to the decision to trade, its expected profi tability, and eventually the allocation of resources between tradable and non-tradable goods and services [4]. Furthermore, the relationship between exchange rate volatility and the volume of international trade can be affected by many other factors, such as the degree of competition, the role of invoicing currency, the absence of imported inputs, the aversion to risk, the commodity and geographical structure of trade or the availability of exchange rate hedging instruments.…”

Real Exchange Rate Volatility and Sectoral Export Flows Under Intermediate and Flexible Exchange Rate Regimes: Empirical Evidence From Turkey

“…While some of the studies find negative effects of exchange rate volatility on international trade flows, some of them find positive or statistically insignificant effects of exchange rate volatility on trade flows. McKenzie (1999) and Auboin and Ruta (2013) gave theoretical and empirical literature surveys about exchange rate volatility and international trade flows. The empirical results that examine the relationship between exchange rate volatility and international trade flows in Turkey are few.…”

“…However, the current debate about this issue is that sectoral data can be helpful to disentangle the linkages between the exchange rate volatility and trade flows that may exist across sectors but not in total trade flows (Bahmani-Oskooee & Durmaz, 2016;Auboin & Ruta, 2013). In this framework, Çağlayan and Di (2010) investigated empirically the effects of real exchange rate volatility on sectoral bilateral trade flows between the United States and its top 13 trading partners.…”

The Exchange Rate Response of Credit-Constrained Exporters: The Role of Location

“…Incomplete exchange rate pass-through to (domestic) prices is a part of the explanation for the weak link between exchange rates and exports (see for instance Goldberg and Knetterer [6], Nahamura and Zermon [7], Rodriguez-Lopez [8] or Aubion and Ruta [9] for comprehensive surveys). A number of explanations have been put forward for the less than perfect pass-through, ranging from pricing to-market (see Atkeson and Burstein [10]) and local distribution costs (see Corsetti and Dedola [11]) to short-run nominal rigidities (see Gopinath, Itskhoki and Rigobon [12]).…”