Volatility of exchange rates and international trade: Theory and evidence across developed and developing economies

This dissertation explores different aspects of exchange rate volatility and its economic consequences across developed and developing economies for a wide range of volatility measures. Analyses in Chapter I include a comparison of pre and post-crisis economic performances of selected East Asian countries affected most during the financial crisis of 1997. A partial equilibrium model developed in Chapter II identifies the channels through which the volatility of the exchange rates affects international trade. Moreover, the validity of the theoretical results is investigated empirically using data for a group of developed and developing countries. Chapter III is an empirical investigation of the impact of the volatility of exchange rates on international trade for four East Asian countries.; A precipitous decline in both nominal and real exchange rates of a domestic currency of most East Asian countries produces not only structural breaks in their exchange rates series but also reduces their volume of exports abruptly. It is evident from the theoretical model that both in the presence and absence of forward exchange market an increase in the variability of exchange rates reduces the volume of exports. Real exports of a country increase with an increase in the mean level of exchange rates and also with an increase in the forward premium. Developing countries may increase their profits from international trade through increased level of accessibility to the foreign exchange markets.; The empirical evidence on the relationship between the volatility of exchange rates and volume of exports provides mixed results across developed and developing countries. In the case of developing countries volatility of exchange rates has a significant negative effect on the volume of exports both in short run and in long run. But the relationship is found ambiguous for quarterly trade data (1990 to 2001) among developed economies. The direction of volatility-trade relationship and the degree of effects depend on many factors including choice of sample periods, volatility measures, and country considered.