The Relationship between Exchange Rates and International Trade: A Review of Economic Literature

29 Pages Posted: 7 Nov 2011

See all articles by Marc Auboin

Marc Auboin

World Trade Organization (WTO)

Michele Ruta

Economic Research Division, WTO; Columbia Business School - Economics Department; International Monetary Fund (IMF)

Date Written: October 1, 2011

Abstract

This paper surveys a wide body of economic literature on the relationship between currencies and trade. Specifically, two main issues are investigated: the impact on international trade of exchange rate volatility and of currency misalignments. On average, exchange rate volatility has a negative (even if not large) impact on trade flows. 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. Exchange rate misalignments are predicted to have short-run effects in models with price rigidities, but 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. This effect is predicted to disappear in the long-run, unless some other distortion characterizes the economy. Empirical results confirm that short-run effects can exist, but their size and persistence over time are not consistent across different studies.

Keywords: exchange rates, volatility, misalignments, international trade

JEL Classification: F10, F31, F55, O19, G21, G32

Suggested Citation

Auboin, Marc and Ruta, Michele, The Relationship between Exchange Rates and International Trade: A Review of Economic Literature (October 1, 2011). Available at SSRN: https://ssrn.com/abstract=1955847 or http://dx.doi.org/10.2139/ssrn.1955847

Marc Auboin

World Trade Organization (WTO) ( email )

Rue de Lausanne 154
Geneva 21, CH-1211
Switzerland

Michele Ruta (Contact Author)

Economic Research Division, WTO ( email )

Rue de Lausanne 154
CH-1211 Geneva
Switzerland

HOME PAGE: http://www.iue.it/Personal/Fellows/MicheleRuta/Welcome.htm

Columbia Business School - Economics Department ( email )

420 West 118th Street
New York, NY 10027
United States

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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