DOES EXCHANGE-RATE VOLATILITY AFFECT INTERNATIONAL TRADE FLOWS?

The theoretical model of Viaene and de Vries (1992) is presented and an empirical confirmation of its implications concerning the effects of exchange-rate volatility is performed. Positive exchange-rate effects in the presence of a well-developed forward market are documented. When exporters [importers] benefit from changes in exchange-rate volatility. then importers [exporters] necessarily lose. Therefore, the sign of the effect of exchange-rate volatility on trade can, and in some situations should, be positive. In addition. evidence that trade balance (as a proxy for net currency position) is essential in determining the effect of exchange-rate vlatility on trade flows is provided. Failing to rake trade balance into account may help explain why the effect of exchange-rate uncertainty on trade has often been small in magnitude and or statistically insignificant in numerous prior studies.