DOES EXCHANGE-RATE VOLATILITY AFFECT INTERNATIONAL TRADE FLOWS?
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The theoretical model of Viaene and de Vries(1992) is presented and an empirical confirmation of its implications concerning the effects of exchange-rate volatility is performed. Positive exchange-rate effects in the presence of a well-developed forward market are documented. When exporters [importers] benefit from changes in exchange-rate volatility., then importers [exporters] necessarily lose. Therefore, the sign of the effect of exchange-rate volatility on trade can, and in some situation should, be positive. In addition evidence that trade balance (as a proxy for net currency position) is essential in determining the effect of exchange-rate volatility on trade flows is provided. Failing to take trade balance into account may help explain why the effect of exchange-rate uncertainty on trade has often been small in magnitude and or statistically insignificant in numerous prior studies.
Abstract
The theoretical model of Viaene and de Vries(1992) is presented and an empirical confirmation of its implications concerning the effects of exchange-rate volatility is performed. Positive exchange-rate effects in the presence of a well-developed forward market are documented. When exporters [importers] benefit from changes in exchange-rate volatility., then importers [exporters] necessarily lose. Therefore, the sign of the effect of exchange-rate volatility on trade can, and in some situation should, be positive. In addition evidence that trade balance (as a proxy for net currency position) is essential in determining the effect of exchange-rate volatility on trade flows is provided. Failing to take trade balance into account may help explain why the effect of exchange-rate uncertainty on trade has often been small in magnitude and or statistically insignificant in numerous prior studies.