3. Identifying the Relationship between Trade and Exchange Rate Volatility
Christian Broda,John Romalis +1 more
- pp 79-110
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TLDR
In this paper, Aguiar et al. developed a model of international trade in which international trade depresses real exchange rate volatility and exchange-rate volatility impacts trade in products differently according to their degree of differentiation.Abstract:
We develop a model of international trade in which international trade depresses real exchange rate volatility and exchange rate volatility impacts trade in products differently according to their degree of differentiation. In particular, commodities are less affected by exchange rate volatility than more highly differentiated products. These insights allow us to simultaneously identify both channels of causation, thereby structurally addressing one of the main shortcomings of the existing empirical literature on the effects of exchange rate volatility on trade — the failure to correct for reverse causality. Using disaggregate trade data for a large number of countries for the period 1970-1997 we find strong results supporting the prediction that trade dampens exchange rate volatility. We find that once we address the reverse-causality problem, the large effects of exchange rate volatility on trade found in some previous literature are greatly reduced. In particular, the estimated effect of currency unions on trade is reduced from 300 percent to be between 10 and 25 percent. ∗Thanks are due to Mark Aguiar, Guillermo Calvo, Robert Feenstra, Erik Hurst, Silvana Tenreyro, Shang-Jin Wei, Kei-Mu Yi, and participants at seminars at Chicago GSB, Federal Reserve System Committee Meeting, LACEA Conference 2003, NBER, Minnesota, RIN Conference 2003, and Wisconsin for helpful suggestions. Any errors are our own.read more
Citations
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Global Bond Portfolios and EMU
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US trade and exchange rate volatility: a real sectoral bilateral analysis
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The Relationship between Exchange Rates and International Trade: A Literature Review
TL;DR: In this article, a wide body of economic literature on the relationship between currencies and trade is surveyed, and two main issues are investigated: the impact on international trade of exchange rate volatility and currency misalignments.
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The Relationship between Exchange Rates and International Trade: A Literature Review
Marc Auboin,Michele Ruta +1 more
TL;DR: In this article, a wide body of economic literature on the relationship between currencies and trade is surveyed, and two main issues are investigated: the impact on international trade of exchange rate volatility and of currency misalignments.
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Exchange rates, international trade and trade policies
TL;DR: The authors investigated the impact of exchange rate volatility and misalignment on international trade and explored whether exchange rate misalignments affect governments' decisions regarding trade policies, finding that short-term exchange-rate volatility is generally not a serious concern.
References
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Principles of Economics
TL;DR: In this article, the authors present a survey of the general relations of demand, supply, and value in terms of land, labour, capital, and industrial organization, with an emphasis on the fertility of land.
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Scale Economies, Product Differentiation, and the Pattern of Trade
TL;DR: In this article, the authors present a simple formal analysis which incorporates these elements, and show how it can be used to shed some light on some issues which cannot be handled in more conventional models.
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Networks versus Markets in International Trade
TL;DR: In this article, the authors propose a network/search view of international trade in differentiated products and present evidence that supports the view that proximity and common language/colonial ties are more important for differentiated products than for products traded on organized exchanges in matching international buyers and sellers.