After the Bretton Woods exchange rate system in 1973, the free-floating exchange rate, the rate determined by the forces of supply and demand, began, which developed an interest in the area of many researchers to investigate, theoretically and empirically, the impact of exchange rate volatility on the world trade flows. There are two channels, direct and indirect, through which the change in exchange rate affects domestic prices. Under the direct channel, a fall in exchange rate leads to increase in imports as well as increases the prices of inputs in domestic currency. Secondly, under the indirect channel, a decline in the exchange rate triggers the availability of domestic goods to foreign buyers at a cheaper rate, and the demand for domestic products increased. Thus, the change in exchange rate affects trade flows either positively or negatively.
Measuring the relationship between the balance of payments and the exchange rate - A case study of a group of Arab countries during the period 2000/2016-