The Relationship between Exchange Rates and International Trade: A Review of Economic Literature

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. Terms of use: Documents in AbstractThis 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. Exchange rate misalignments are predicted to have short-run effects in models with price rigidities, but 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 long-run, 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.

Exchange Rate Policy and Regional Trade Agreements: A Case of Conflicted Interests?

“…5 We use "depreciation" as a general term to cover a fall in a currency's value relative to another currency or basket of currencies, without regard to whether the currency was previously pegged or not. This section draws on the more detailed surveys by Coric and Pugh (2010), Huchet-Bourdon and Korinek (2011), and Auboin and Ruta (2011). papers have similar results (e.g., Bahmain-Oskooee and Hegerty [2007]; Arize et al [2008]) find a significant negative relationship between exchange rate volatility and export flows of eight Latin American countries, while Tenreyro (2007) using a global sample of 87 countries concludes that exchange rate volatility has no significant effect on trade flows. The conventional wisdom appears to be that there may be a negative relationship between volatility and trade, but if it exists it is of minor importance (Coric and Pugh 2010;Auboin and Ruta 2011, Annex 1).…”

“…The relationships may be nonlinear and sensitive to the choice of time horizon (due, for example, to J-curve effects). Auboin and Ruta (2011) conclude that the results are inconclusive because the exchange rate is just one of many influences on the trade balance.…”

“…Hedging can reduce risk, but involves extra costs (Caporale and Doroodian 1994;Obstfeld and Rogoff 1998). The theoretical literature is reviewed by Auboin and Ruta (2011).…”

Has Generalized System of Preferences Scheme Influenced Nepalese Exports to the United States? An Empirical Analysis

“…Ojha (2010) draws two inferences regarding foreign trade of Nepal after 1996: one imports from India is increasing at a faster pace and secondly, exports to third country is decreasing. Auboin and Ruta (2011) find positive correlation between exchange rate and international trade, however, empirical testing of Devkota (2000) shows that change in exchange rate does not affect trade balance of Nepal. Sachs and Warner (1995) find that growth is positively related to an openness indicator based on a number of policies that affect international economic integration.…”

“…Studies of Auboin and Ruta (2011) and Devkota (2000) show impact of exchange rate in foreign trade but they short implication of GSP. Paper of Sachs and Warner (1995) lacks documentary evidence of Nepal.…”