Exchange Rate Volatility and International Trade

Abstract

Copyright: © 2014 Tsen WH. This is an open-access article distributed under the terms of the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original author and source are credited. There is a vast amount of studies on the impact of exchange rate volatility on international trade [1-3]. The rationale of examining the impact of exchange rate volatility on international trade is that exchange rate volatility induces uncertainty into international transactions. This uncertainty decreases international trade and economic welfare [4]. Nonetheless, the impact of exchange rate volatility on international trade is theoretically and empirically ambiguous. Theoretically, exchange rate volatility can have a negative impact or a positive impact on international trade [3]. Empirically, there is no general consensus about the impact of exchange rate volatility on international trade although various measures of exchange rate volatility, different data sets either aggregated data or disaggregated data and various statistical methods such as the cointegration analysis and the panel data analysis have been tried [5,6]. The impact of exchange rate volatility on international trade can be considered as a case-by-case basis. Thus, many studies have been carried-out to examine the impact of exchange rate volatility on international trade for developing, emerging and developed countries. Nevertheless, Coric and Pugh [2] investigate the impact of exchange rate volatility on international trade using a meta-regression analysis on a total of 49 studies for the period from 1978 to 2002. The results demonstrate that there is an adverse impact of exchange rate volatility on international trade. Besides, the negative impact of exchange rate volatility is mostly found for study using disaggregated data. This finding is particularly significant for developing countries where forward and future and options markets are less developed compared with those in developed countries.