Exchange Rate Volatility and

Trade

BRETTON WOODS SYSTEM

Established the rules of
commercial and financial relations
among the worlds major industrial
states.
The chief feature were an
obligation for each country to
maintain fixed exchange rate.

Collapse
of
the
exchange rates system.

Bretton-Woods

The Liberalization of capital flows and

cross border financial transaction

VOLATILITY OF EXCHANGE
RATE
Impact on exports and imports.
Different impact on different countries and
different markets.
A negative effect of volatility on trade if
hedging is not possible or costly

Reduce exports to maxamize the

expected utility of profit under
higher volatile exchange rate.
Under the maintained hypothesis
of risk aversion,the sign of the
effect becomes ambiguous once
the restrictions are relaxed.

Impact of exchange rate depreciation on the developed

world

J-Curve effect.

Impact of exchange rate depreciation on the developing

world

NO J-Curve effect.

Appreciation of exchange rate

Hysterisis effect

China Indonesia Malaysia Philippines Thailand

B. Real exchange rate volatility
1. Standard Deviation: 8 quarters (SD-8q)

_____________________________________________________________________________

Mean
0.0689 0.0971
0.0545
0.0731
0.0614
0.0710
Std. Dev. 0.0444
0.0792
0.0332
0.0368
0.0424
0.0521
___________________________________________________________________
2. Moving Average Standard Deviation (MASD)
Mean
0.0877
0.1283
0.0728
0.0997
0.0825
0.0942
Std. Dev. 0.0552
0.1087
0.0484
0.0566
0.0657
0.0729

_____________________________________________________________________________

3. GARCH volatility
Mean
0.0028
0.0067
0.0013
0.0026
0.0017
0.0030
Std. Dev. 0.0064
0.0184
0.0029
0.0088
0.0087
0.0105
___________________________________________________________________
C. Correlations between aggregate exports and exchange rate volatility
SD-8q -0.1223
0.0023
-0.0470
-0.1992
-0.0689
-0.0904
MASD -0.0649
0.0025
-0.0529
-0.1748
-0.0626
-0.0871
GARCH -0.0915
-0.0203
-0.0229
-0.0720
-0.0337
-0.0471

AllCountries

CONCLUSION
Ultimately, the relationship between
exchange rate volatility and trade flows is
analytically indeterminate.