• Exchange rates and currency

Exchange rates and currency

This paper, based on the East Asia context, examines the consequences of the volatility of exchange rates for the development of international trade and foreign direct investments. It analyses the differences in the impact of exchange rate volatility on entering into production networks and, secondly, on trade in intermediate goods and final products.
In the study, the authors:

• examine whether the volatility has greater negative impact on trade in East Asia than in other regions of the world 
• quantify the degree to which the volatility hampers international trade in East Asia, compared with the effect of tariffs and distance-related costs 
• construct a different unanticipated volatility measure to examine its impact on international trade 
• examine whether trade in machinery parts is more sensitive to volatility than finished machinery products

The study’s findings are that:

• intra-East Asian trade is more seriously inhibited by exchange rate volatility than trade in other regions. The contributory factors to this are the immaturity of the international exchange market and of hedging instruments. Intermediate goods also trade in international production networks, which is quite sensitive to exchange rate volatility compared with other types of trade, occupies a significant fraction of East Asian trade 
• unanticipated volatility has a slightly larger discouraging impact on trade than tariffs. However its impact is smaller than that of distance related costs
• trade in machinery parts is more sensitive to exchange rate volatility than trade in finished machinery goods
• the negative effect of exchange rate volatility on trade is more robust in the case of East Asian trade, than is shown in almost all previous studies on exchange rate volatility and international trade

Based on the findings of the Study the authors make the following conclusions:

• stable transactions of parts are crucial to the formation of production networks in a region 
• a large portion of the negative impact of exchange rate volatility is induced by its unanticipated part
• stable transactions of parts are crucial to the formation of production networks in East Asia 
• the introduction of a basket currency or a common currency may contribute to enhancing the magnitude of international trade as well as encouraging FDI
  

• Full text of document
• Publisher details
• Send to a friend