The Impact of Exchange Rate Volatility on International Trade

Abstract

Abstract: Purpose: This research paper aims to examine the impact of exchange rate volatility on international trade. It explores the relationship between fluctuations in exchange rates and the volume of trade between countries.

Theoretical framework: The study is grounded in the theoretical frameworks of international trade theory and macroeconomics. It considers concepts such as the law of one price, purchasing power parity, and the J-curve effect to provide a comprehensive understanding of how exchange rate volatility affects trade flows.

Design/methodology/approach: This research paper adopts a systematic literature review approach to synthesize and analyze existing studies on the impact of exchange rate volatility on international trade. It incorporates a wide range of empirical studies from different countries and time periods to ensure a robust analysis.

Findings: The findings reveal that exchange rate volatility has a significant and complex impact on international trade. While some studies suggest that increased volatility can impede trade by creating uncertainty and transaction costs, others find that it can also stimulate trade by enhancing price competitiveness and improving market efficiency.

Research, Practical & Social implications: This research paper provides valuable insights for policymakers, businesses, and international organizations. Understanding the relationship between exchange rate volatility and trade can help governments formulate appropriate policies to mitigate negative effects and capitalize on potential benefits. Furthermore, businesses can develop effective risk management strategies and make informed decisions regarding international trade.

Originality/value: This research paper contributes to the existing literature by providing a comprehensive review of studies on the impact of exchange rate volatility on international trade. It offers a balanced analysis of both the positive and negative effects of volatility, highlighting the need for context-specific approaches to mitigate risks and leverage opportunities.