A New Look at Exchange Rate Volatility and Trade Flows

The effect of exchange rate volatility on trade flows was examined by a 1984 IMF study on G-7 countries. Over the past two decades, many developments in the world economy, such as the currency crises in the 1990s and increasing cross-border capital flows, may have exacerbated exchange rate volatility, while others, such as a deepening of the market in foreign exchange hedging instruments, may have reduced the impact of volatility on trade flows. Using recent advances in the economic theories on trade and in statistical methodologies, this paper revisits this important issue by taking into account these new developments and examining their effects on developing and transition economies, as well as on developed countries.Exchange rates;Trade;Capital flows;exchange rate, exchange rate volatility, real exchange rate, bilateral trade, world trade, exchange rate variability, international trade, trade flows, nominal exchange rate, exchange rate fluctuations, aggregate trade, real exchange rate volatility, world trade organization, currency unions, exchange rate regimes, exchange rate risk, transition economies, measures of volatility, exchange rate regime, bilateral exchange rate, exchange rate movements, trading partners, free trade, real exchange rates, trade agreement, free trade agreement, official exchange rate, trade data, foreign exchange, exchange rate uncertainty, exchange risk, exchange arrangements, fluctuations in exchange rates, market exchange rate, world economy, bilateral exchange rates, movements in exchange rates, exchange restrictions, exchange rate data, export earnings, exchange markets, exchange rate arrangement, transition countries, nominal exchange rates, exchange rate arrangements, nominal official exchange rate, foreign exchange markets, export market, parallel exchange rate, aggregate volatility, bilateral imports, foreign exchange risk, bilateral trade barriers, trade barriers, increased trade, trade patterns, domestic prices, export prices, volatility in exchange rates, trade theories, bilateral trade flows, balance of payments, monetary union, volatile exchange rates, effective exchange rate, intermediate inputs, exchange rate volatilities, multinational firms, volume of trade, forward exchange, exchange rate mechanism, currency risk, balance of payments crises, aggregate exchange rate, preferential trading arrangements, foreign trade, currency areas, preferential trading, history of exchange rate, flexible exchange rates, import prices, market exchange rates, exchange rate change, world exports, trading arrangements, exchange rate systems, exchange rate system, factor endowments, trade model, relative price of goods, bilateral real exchange rate, trade impact, stable exchange rates, dollar exchange rate, international financial statistics, parallel exchange rates, classification of exchange rate, exchange rate exposure, effective exchange rates, global shocks, international financial, exchange rate flexibility, trade liberalization, exchange rate determination, trade costs, domestic demand, real effective exchange rate, exchange rate classification, trade effects, floating exchange rate, exchange rate classifications, optimum currency areas, trade volume, trading arrangement, log exchange rate, trade integration, national borders, currency risks, open economies, bilateral trade data, partial equilibrium, imperfect competition, alternative exchange rate, trade flow data, monetary integration, terms of trade, spot exchange rate, multinational corporations, currency values, trade creating, real exchange rate uncertainty, alternative exchange rate regimes, forward cover, exchange rate instability, trade share, value of trade, international trading, euro exchange rates, export price, bilateral tariff, nontariff barriers, trade theory, merchandise trade, trade volumes, currency markets, trading partner, political economy, trade flow, current exchange rate, protectionist pressures, export markets, international integration, transition economy, trade gains, imported inputs, equilibrium model, regional trade, foreign exchange rates, trade growth, market integration, trade classification, exchange rate changes, trade blocs