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WTO Working Papers

WTO working papers usually represent research in progress. Such research may be conducted in the preparation of WTO Secretariat reports, studies or other material for WTO members. The papers are circulated for comment because the WTO considers critical review of professional research to be extremely important.

English

The Relationship Between Exchange Rates and International Trade

A Review of Economic Literature

This paper surveys a wide body of economic literature on the relationship between currencies and trade. 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, 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.

English

Keywords: misalignments, international trade, volatility, Exchange rates
JEL: G21: Financial Economics / Financial Institutions and Services / Banks; Depository Institutions; Micro Finance Institutions; Mortgages; F55: International Economics / International Relations, National Security, and International Political Economy / International Institutional Arrangements; F10: International Economics / Trade / Trade: General; G32: Financial Economics / Corporate Finance and Governance / Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill; F31: International Economics / International Finance / Foreign Exchange; O19: Economic Development, Innovation, Technological Change, and Growth / Economic Development / International Linkages to Development; Role of International Organizations
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