Exchange rate impacts on international trade

As international trade activities are increased, there are more regulative practices which might be barriers to trade. One of such hindrances is exchange rate volatility that affects trade activities both directly and indirectly. Exchange rate volatility of currencies can affect the trade engagements and as well as the trade balance of a country. One of the implications of the study is that the impacts of monetary policy changes on trade activities can be noticed significantly in the long-term. While impacts on export levels are usually immediate, import levels are changed in long-run. The research analyzes the correlation between inflation and devaluation and clearly states their impacts on trade balance. The case study about devaluation of the currency of Azerbaijan elaborates the impacts of currency volatility on exports which is illustrated and analyzed in this research. Moreover, inflation and devaluation correlations and their impacts on import level of a country are studied through correlation and multiple regression analyses based on the data exported from OECD and World Bank. The results conclude that exchange rate volatility significantly impacts the trade balance in terms of imports and exports. Given the results, exchange rate is a non-trade barrier and affects foreign trade.

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Are the Responses of Sectoral Energy Imports Asymmetric to Exchange Rate Volatilities in Pakistan? Evidence From Recent Foreign Exchange Regime

Frontiers in Energy Research ◽

10.3389/fenrg.2021.614463 ◽

2021 ◽

Vol 9 ◽

Author(s):

Abdul Saqib ◽

Tze-Haw Chan ◽

Alexey Mikhaylov ◽

Hooi Hooi Lean

Keyword(s):

Exchange Rate ◽

Crude Oil ◽

Foreign Exchange ◽

Exchange Rate Volatility ◽

Asymmetric Effects ◽

Unit Root Testing ◽

Long Run ◽

Short Run ◽

Bound Test

Growing energy demand but stagnant production followed by volatile exchange rate leads Pakistan to energy imbalances and potential economic contraction. Yet, studies on sectoral energy imports are limited and inconclusive without accessing the asymmetric effect of currency fluctuations. We examine the impacts of Pakistani rupee volatility on monthly energy imports based on the nonlinear autoregressive distributed lag (NARDL) estimations. Augmented Dickey–Fuller and Phillips–Perron tests were used to conduct unit root testing, and the bound testing approach was used to examine the long-term cointegration. The long-run asymmetry was tested with the Wald test, and using the NARDL model, we examined both short-run and long-run asymmetric effects of exchange rate volatility on energy imports. The bound test was established and supported through ECMt−1 (t-test), cointegrating the relationship between exchange rate volatility and energy imports in a long term. Among others, both short-run and long-run asymmetric effects were found for crude oil, coal, electricity, and petroleum products. Rupee depreciation increased crude oil and electricity imports, while the appreciation effects were insignificant. Overall, the empirical assessment reveals that the foreign exchange volatility effect is sectoral specific and asymmetric in Pakistan. It offers new insights into re-strategizing the energy policy and refining the import substitution plan.

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Exchange rate volatility and exports from India: a commodity-level panel data analysis

Journal of Financial Economic Policy ◽

10.1108/jfep-11-2018-0157 ◽

2019 ◽

Vol 12 (1) ◽

pp. 23-44

Author(s):

Chandan Sharma

Keyword(s):

Exchange Rate ◽

Panel Data ◽

Exchange Rate Volatility ◽

Nominal Exchange Rate ◽

Exchange Rate Risk ◽

Content Type ◽

Long Run ◽

Short Run ◽

The Relationship

PurposeThis study aims to examine the relationship between exchange rate risk and export at commodity level for the Indian case.Design/methodology/approachThe monthly panel data used for analysis are at a disaggregated level, which cover around 100 products, encompassing all merchandize sectors for the period spanning from 2012:12 to 2017:11. To measure the exchange rate volatility, the authors use real as well as nominal exchange rate concepts and predict the volatility of exchange rate using the autoregressive conditional heteroscedastic-based model. They use pooled mean group, mean group and common correlated effects mean group estimator that is suitable for the objectives and data frequency.FindingsThe empirical analysis indicates both short- and long-term negative effects of exchange rate variations on exporting. Specifically, in the long run, real exchange rate as well as nominal exchange rate volatility has significant effects on export performance, yet, the effects of uncertainty of nominal exchange rate is much severe and intense. In the short run, it is the nominal exchange rate uncertainty that hurts exports from India. Nevertheless, the short-run effect is much lesser than the long-run, supporting the argument that the short-term exchange rate risk can be hedged, at least partially, through financial instruments; however, uncertainty of the long-term horizon cannot be hedged easily and cost-effectively.Practical implicationsReducing uncertainty and attaining stability in exchange rate and price level should be an important policy objective in developing countries such as India to achieve higher export growth, both in the short and long run.Originality/valueUnlike previous studies, this paper tests the relationship using micro-level data and uses advanced econometric techniques that are likely to provide more precise information regarding the association between exchange rate volatility and trade flows.

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

World Trade Review ◽

10.1017/s1474745613000025 ◽

2013 ◽

Vol 12 (3) ◽

pp. 577-605 ◽

Cited By ~ 45

Author(s):

MARC AUBOIN ◽

MICHELE RUTA

Keyword(s):

International Trade ◽

Exchange Rate ◽

Exchange Rates ◽

Small Firms ◽

Exchange Rate Volatility ◽

Production Networks ◽

Global Production Networks ◽

Long Run ◽

The Impact ◽

The Relationship

AbstractThis paper surveys a wide body of economic literature on the relationship between exchange rates and trade. Specifically, two main issues are investigated: the impact of exchange rate volatility and of currency misalignments on international trade flows. On average, exchange rate volatility has a negative (even if not large) impact on trade. 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 short-run 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. Trade effects of currency misalignments are predicted to disappear in the long-run, unless an economy is characterized by other relevant distortions. Empirical results broadly confirm these theoretical predictions.

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Asymmetric effect of exchange rate volatility on trade balance in Nigeria

National Accounting Review ◽

10.3934/nar.2021018 ◽

2021 ◽

Vol 3 (3) ◽

pp. 342-359

Author(s):

Nuraddeen Umar Sambo ◽

◽

Ibrahim Sambo Farouq ◽

Mukhtar Tijjani Isma'il ◽

◽

...

Keyword(s):

International Trade ◽

Exchange Rate ◽

Real Exchange Rate ◽

Financial Development ◽

Trade Balance ◽

Exchange Rate Volatility ◽

The Real ◽

Non Linear ◽

The Relationship ◽

Real Exchange Rate Volatility

<abstract> The relationship between real exchange rate volatility and the trade balance has been a contentious issue since the fall of Bretton woods agreement of 1973, owing to the lack of unanimity on the effect. This article provides empirical evidence of the link between the real exchange rate volatility and the trade balance in the light of financial development, confirming the assertion that the effect is significantly dependent on the country's level of financial development. Due to Nigeria's relatively undeveloped financial system, its exchange rate dampens the country's exports. Rather than studying the relationship in isolation, we examine the moderating role of financial development on the link between export and the real exchange rate volatility in this paper. The empirical estimation is based on the Nigeria's data set spanning the years 1980–2019, and it employs threshold autoregressive non-linear co-integration and non-linear ARDL estimation techniques. According to the findings, financial development magnifies the beneficial benefits of the real exchange rate on Nigeria's foreign trade. It also states that the uncertainty in foreign capital flows has a negative impact on Nigeria's international trade. The findings have broad policy implications, implying that in order to diversify and improve the economy's future growth and associated international trade, Nigeria's policymakers should promote adequate financial sector development, as financial shocks are amplified by poorly implemented credit markets. </abstract>

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Modeling the volatility of exchange rate and international trade in Ghana: empirical evidence from GARCH and EGARCH

Journal of Economic and Administrative Sciences ◽

10.1108/jeas-11-2020-0187 ◽

2022 ◽

Vol ahead-of-print (ahead-of-print) ◽

Author(s):

Abdul-Razak Bawa Yussif ◽

Stephen Taiwo Onifade ◽

Ahmet Ay ◽

Murat Canitez ◽

Festus Victor Bekun

Keyword(s):

International Trade ◽

Exchange Rate ◽

Standard Deviation ◽

Exchange Rates ◽

Empirical Studies ◽

Exchange Rate Volatility ◽

Moving Averages ◽

Content Type ◽

Long Run ◽

Trading Partners

PurposeThe volatility of exchange rate has generally been sighted as a primary cause for various shocks and instability in international trade of Ghana as witnessed over the years and most especially in recent times. Hence, owing to the increasing trade levels between Ghana and Ghana's global trading partners, the study aims to investigate if the trade–exchange rate volatility nexus in Ghana supports the positive, negative or ambiguous hypotheses?Design/methodology/approachThe study investigates the effects of Ghana's exchange rate volatility on international trade by designing import and export equations to estimate both short- and long-run specifications of the effect and employing the multivariate generalized autoregressive conditional heteroskedasticity (GARCH) with Baba, Engle, Kraft and Kroner (BEKK) specification developed by Engle and Kroner (1995) as a further check for the robustness of the findings. Monthly data between 1993 and 2017 on the real effective exchange rates of Ghana's trade with 143 trading partners were taken as the series for modeling the volatility using GARCH andexponential generalized autoregressive conditional heteroskedastic (EGARCH) models.FindingsThe empirical results show that the volatility of exchange rate negatively impact export performances in the Ghanian economy. On the other hand, there was no sufficient evidence to support the observed positive effect of exchange rate volatility on imports, as the effects were only significant at 10% level in the long run. Thus, it is concluded that the finding cannot confirm a relationship between volatility and import. Thus, the results present differences in the direction of the effect of exchange rate volatility on imports and exports in the context of the Ghanaian economy.Research limitations/implicationsConsidering the fragility of the Ghanaian economy and Ghana's macro-economic indicators, the study points at the crucial need for more integration of well-informed trade policies within the country's macro-economic policy framework to contain the impacts of exchange rate volatility on trade performances.Practical implicationsThe study contributes to literature by scope and method. More specifically, empirical studies have failed or provided little evidence uniquely on the Ghanaian economy's reaction to exchange rate volatility on the country's imports and exports. Additionally, most of the existing empirical studies measure exchange rate volatility using the standard deviation of the moving averages of the logarithmic transformation of exchange rates. This method is criticized because the method is unsuccessful in capturing the effects of potential booms and bursts of the exchange rate. The authors' study circumvents for these highlighted pitfalls.Social implicationsThe study contributes to literature by scope and method. More specifically, empirical studies have failed or provided little evidence uniquely on the Ghanaian economy's reaction to exchange rate volatility on the country's imports and exports. Thus, the study chat a course for socio-economic dynamic of Ghanaian economy.Originality/valueThe study contributes to literature by its scope and method, as extant empirical studies have provided little evidence specifically on the Ghanaian economy's reaction to exchange rate volatility. Additionally, most of the existing empirical studies measure exchange rate volatility using the standard deviation of the moving averages of the logarithmic transformation of exchange rates. This method is criticized because of the method's inadequacies in capturing the effects of potential booms and bursts of the exchange rate. The study thereby essentially circumvents for these highlighted pitfalls.

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EFFECT OF EXCHANGE RATE VOLATILITY ON UGANDA'S TRADE BALANCE

Advances in Social Sciences Research Journal ◽

10.14738/assrj.85.10017 ◽

2021 ◽

Vol 8 (5) ◽

pp. 532-574

Author(s):

Qianling Shen ◽

Henry Orach ◽

Pu Chen ◽

Shiying Wei ◽

Hassan Ssewajje ◽

...

Keyword(s):

Exchange Rate ◽

Exchange Rates ◽

Real Exchange Rate ◽

Trade Balance ◽

Real Exchange Rates ◽

Exchange Rate Volatility ◽

Data Generation ◽

Long Run ◽

Short Run ◽

Adf Test

This study examines the long-run and the short-run relationship between the real exchange rate, GDP, FDI, inflation (INF), gross capital formation (GCF), Net official's development assistance (NODA), GNI, and trade balance in Uganda for the period 1994-2018. We used an Augmented Dickey-Fuller (ADF) test for the stationarity test, and we use the Johannsen cointegration approach to prove the existence of cointegration. The ADF tests show that the series was non-stationary in level but became stationary after the first difference. The Johannsen cointegration test indicates the long and short-run relationship between all the explanatory and trade balance in Uganda. Under such circumstances, a Vector Error Correction Model (VECM) is employed since the results offer more information than other data generation processes. Our findings are as follows: Real exchange rates, FDI, GCF and have a positive relationship with Trade balance. It means that Uganda can depreciate the Exchange rate to improve its Trade balance. The results proved the J-Curve effect's existence (i.e., the long-term impact of exchange rate on trade balance). The recommendations from this study are - Uganda's monetary policy management should emphasize more efforts on the stability and minimization of the volatility of exchange rates of the shillings since its movements affect international prices both negatively and positively, leading to either a decline or trade boost. Keywords: Trade balance; Real exchange rate; Net official's development assistances; GNI; VECM model; Uganda

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The Effects of Global Financial Crisis on International Trade: Exchange Rate Volatility vs. Finance. Case of Cameroon

SSRN Electronic Journal ◽

10.2139/ssrn.2941082 ◽

2017 ◽

Author(s):

Senge Geraldine Alobwede ◽

Tasoh Martin Toh

Keyword(s):

International Trade ◽

Exchange Rate ◽

Financial Crisis ◽

Global Financial Crisis ◽

Exchange Rate Volatility

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Currency Depreciation, Trade Balance and Intra-Industry Trade Interactions in Turkey’s OECD Trade

International Journal of Economics and Finance ◽

10.5539/ijef.v8n4p8 ◽

2016 ◽

Vol 8 (4) ◽

pp. 8 ◽

Cited By ~ 1

Author(s):

Mehmet Demiral

Keyword(s):

Exchange Rate ◽

Trade Balance ◽

Real Effective Exchange Rate ◽

Series Data ◽

Adjustment Process ◽

Industry Trade ◽

Long Run ◽

Effective Exchange ◽

Short Run ◽

Effective Exchange Rate

This study re-examines the determinants of Turkey’s trade balance in its manufactures trade with 33 OECD-member countries for the short-run and the long-run. Unlike other studies, in the relationships we also control the moderating effects of the availability of import substitutes proxied by intra-industry trade. We analyze quarterly aggregated time-series data of the period spanning from 1998.QI to 2015.QIII, following the autoregressive distributed lag (ARDL) bounds testing approach to the cointegration and the error correction modeling. Estimation results reveal that real effective exchange rate, together with domestic and foreign incomes are still among the core determinants of Turkey’s trade balance in the manufacturing sectors. There is no significant impact of domestic final oil prices that also include all the taxes on gasoline. The trade balance depends on domestic income negatively and the aggregated income of the OECD countries positively. The finding that real depreciation of Turkish lira against to those of Turkey’s OECD trade partners improves trade balance in both the short-run and the long-run, indicates no evidence of J-curve adjustment process. Unsurprisingly, the intra-industry trade seems to be an important factor that moderates the elasticities of trade balance to its determinants, especially to real effective exchange rate and domestic income. Overall results underline the importance of import-substitution capability besides the export-oriented production to ease the longstanding large trade deficits for Turkey.

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The Effect of Real Exchange Rate on Trade Balance in a Resource-Rich Economy: The Case of Mongolia

Foreign Trade Review ◽

10.1177/0015732518797184 ◽

2018 ◽

Vol 53 (4) ◽

pp. 211-224 ◽

Cited By ~ 2

Author(s):

Gan-Ochir Doojav

Keyword(s):

Exchange Rate ◽

Real Exchange Rate ◽

Trade Balance ◽

Developing Economies ◽

Jel Classification ◽

Vector Error Correction ◽

Vector Error ◽

Long Run ◽

Short Run ◽

Exchange Rate Depreciation

For resource-rich developing economies, the effect of real exchange rate depreciation on trade balance may differ from the standard findings depending on country specific characteristics. This article employs vector error correction model to examine the effect of real exchange rate on trade balance in Mongolia, a resource-rich developing country. Empirical results show that exchange rate depreciation improves trade balance in both short and long run. In particular, the well-known Marshall–Lerner condition holds in the long run; however, there is no evidence of the classic J-curve effects in the short run. The results suggest that the exchange rate flexibility may help to deal effectively with current account deficits and exchange rate risk. JEL Classification: C32, C51, F14, F32

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Research On Monetary Neutrality: Evidence From Exchange Rate And Trade Balance Of G-7 Countries

Journal of Applied Business Research (JABR) ◽

10.19030/jabr.v24i2.1351 ◽

2011 ◽

Vol 24 (2) ◽

Cited By ~ 1

Author(s):

Doh-Khul Kim

Keyword(s):

Exchange Rate ◽

Real Exchange Rate ◽

Trade Balance ◽

Monetary Shocks ◽

Font Size ◽

Long Run ◽

Short Period ◽

Short Run ◽

Monetary Neutrality ◽

Nominal Shocks

According to a recent paper by Fisher and Huh (2002), in contrast to a long-run neutrality hypothesis, nominal shocks have long-run effects on a country’s real exchange rate and trade balance. However employing a similar method (VAR) with identical restrictions (long-run neutrality and short-run recursive hypotheses), this paper shows that the effects on the real exchange rate are much shorter in this G-7 country study than what Fisher and Huh (2002) contend. Further, the trade balance improves for a short period of time, from which it can conclude there is a shorter existence of the depreciation effect in response to expansionary monetary shocks, which supports the long-run neutrality hypothesis in an open macroeconomic framework.

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