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The Effect of Exchange Rate Volatility on International Trade: The Implication for Production Networks in East Asia

Discussion Papers

No.156

by HAYAKAWA Kazunobu, KIMURA Fukunari
May 2008

ABSTRACT

This paper is an empirical investigation of the relationship between exchange rate volatility and international trade, focusing on East Asia. It finds that intra-East Asian trade is discouraged by exchange rate volatility more seriously than trade in other regions because intermediate goods trade in production networks, which is quite sensitive to exchange rate volatility compared with other types of trade, occupies a significant fraction of trade. In addition, this negative effect of volatility is mainly induced by the unanticipated volatility and has an even greater impact than that of tariffs.

Keywords: Exchange rate volatility; Trade; East Asia
JEL classification: F10; F31; N75

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