Exchange Rate Uncertainty and Optimal Participation in International Trade

Instead of just focusing on the effect of exchange rate levels (undervalued or overvalued exchange rates) on trade, this paper provides an analysis of the effects of exchange rate volatility levels on international trade. Intuitively, an increase i...

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Main Author: Mundaca, Gabriela
Format: Policy Research Working Paper
Language:English
Published: 2012
Subjects:
Online Access:http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20110316112823
http://hdl.handle.net/10986/3359
id okr-10986-3359
recordtype oai_dc
spelling okr-10986-33592021-04-23T14:02:09Z Exchange Rate Uncertainty and Optimal Participation in International Trade Mundaca, Gabriela BILATERAL TRADE CURRENCY UNIONS DERIVATIVES DERIVATIVES MARKETS DOMESTIC CURRENCY DOMESTIC MARKET ECONOMIC GROWTH EQUILIBRIUM EQUILIBRIUM LEVEL EXCHANGE RATE EXCHANGE RATE BAND EXCHANGE RATE INSTABILITY EXCHANGE RATE LEVEL EXCHANGE RATE LEVELS EXCHANGE RATE REGIMES EXCHANGE RATE RISK EXCHANGE RATE UNCERTAINTY EXCHANGE RATE VARIABILITY EXCHANGE RATE VOLATILITY EXCHANGE RATES EXCHANGE RISK EXPORT MARKET EXPORT SECTOR EXPORTER EXPORTERS FEDERAL RESERVE FEDERAL RESERVE BANK FIXED COST FLEXIBLE EXCHANGE RATES FOREIGN MARKET FOREIGN MARKETS IMPORT IMPORTING COUNTRY INCOME INDEPENDENT MONETARY POLICY INTERNATIONAL BANK INTERNATIONAL ECONOMICS INTERNATIONAL MARKETS INTERNATIONAL MONETARY SYSTEM INTERNATIONAL TRADE INVESTMENT DECISION MARKET DEVELOPMENT MONETARY POLICY NOMINAL EXCHANGE RATE OPTION VALUE POLICY RESEARCH POLITICAL ECONOMY RANDOM WALK REGIME OF TARGET ZONES RELATIVE PRICES RETURN RETURNS RISK AVERSION RISK PREMIUM TRADE FLOWS TRADE IMPACT TRADING VARIABLE COSTS VOLATILITY Instead of just focusing on the effect of exchange rate levels (undervalued or overvalued exchange rates) on trade, this paper provides an analysis of the effects of exchange rate volatility levels on international trade. Intuitively, an increase in exchange rate volatility leads to uncertainty for agents participating in international trade, and such uncertainty might have a negative impact on international trade flows and participation, thereby reducing the advantages of world-wide specialization. This is especially crucial for countries where exchange rate derivatives markets are not yet well developed and the costs of hedging exchange rate risk are very high. The model here considers optimal decisions about participation in international trade under uncertainty about the exchange rate. The main conclusion is that a high level of exchange rate volatility can deter entrepreneurs from becoming exporters, even though exporting can be highly profitable. For those already participating in international trade, it is opposite: they may, optimally, choose not to leave the market even though staying in this market is highly unprofitable in the short run. 2012-03-19T18:00:59Z 2012-03-19T18:00:59Z 2011-03-01 http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20110316112823 http://hdl.handle.net/10986/3359 English Policy Research working paper ; no. WPS 5593 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo/ World Bank Publications & Research :: Policy Research Working Paper The World Region The World Region
repository_type Digital Repository
institution_category Foreign Institution
institution Digital Repositories
building World Bank Open Knowledge Repository
collection World Bank
language English
topic BILATERAL TRADE
CURRENCY UNIONS
DERIVATIVES
DERIVATIVES MARKETS
DOMESTIC CURRENCY
DOMESTIC MARKET
ECONOMIC GROWTH
EQUILIBRIUM
EQUILIBRIUM LEVEL
EXCHANGE RATE
EXCHANGE RATE BAND
EXCHANGE RATE INSTABILITY
EXCHANGE RATE LEVEL
EXCHANGE RATE LEVELS
EXCHANGE RATE REGIMES
EXCHANGE RATE RISK
EXCHANGE RATE UNCERTAINTY
EXCHANGE RATE VARIABILITY
EXCHANGE RATE VOLATILITY
EXCHANGE RATES
EXCHANGE RISK
EXPORT MARKET
EXPORT SECTOR
EXPORTER
EXPORTERS
FEDERAL RESERVE
FEDERAL RESERVE BANK
FIXED COST
FLEXIBLE EXCHANGE RATES
FOREIGN MARKET
FOREIGN MARKETS
IMPORT
IMPORTING COUNTRY
INCOME
INDEPENDENT MONETARY POLICY
INTERNATIONAL BANK
INTERNATIONAL ECONOMICS
INTERNATIONAL MARKETS
INTERNATIONAL MONETARY SYSTEM
INTERNATIONAL TRADE
INVESTMENT DECISION
MARKET DEVELOPMENT
MONETARY POLICY
NOMINAL EXCHANGE RATE
OPTION VALUE
POLICY RESEARCH
POLITICAL ECONOMY
RANDOM WALK
REGIME OF TARGET ZONES
RELATIVE PRICES
RETURN
RETURNS
RISK AVERSION
RISK PREMIUM
TRADE FLOWS
TRADE IMPACT
TRADING
VARIABLE COSTS
VOLATILITY
spellingShingle BILATERAL TRADE
CURRENCY UNIONS
DERIVATIVES
DERIVATIVES MARKETS
DOMESTIC CURRENCY
DOMESTIC MARKET
ECONOMIC GROWTH
EQUILIBRIUM
EQUILIBRIUM LEVEL
EXCHANGE RATE
EXCHANGE RATE BAND
EXCHANGE RATE INSTABILITY
EXCHANGE RATE LEVEL
EXCHANGE RATE LEVELS
EXCHANGE RATE REGIMES
EXCHANGE RATE RISK
EXCHANGE RATE UNCERTAINTY
EXCHANGE RATE VARIABILITY
EXCHANGE RATE VOLATILITY
EXCHANGE RATES
EXCHANGE RISK
EXPORT MARKET
EXPORT SECTOR
EXPORTER
EXPORTERS
FEDERAL RESERVE
FEDERAL RESERVE BANK
FIXED COST
FLEXIBLE EXCHANGE RATES
FOREIGN MARKET
FOREIGN MARKETS
IMPORT
IMPORTING COUNTRY
INCOME
INDEPENDENT MONETARY POLICY
INTERNATIONAL BANK
INTERNATIONAL ECONOMICS
INTERNATIONAL MARKETS
INTERNATIONAL MONETARY SYSTEM
INTERNATIONAL TRADE
INVESTMENT DECISION
MARKET DEVELOPMENT
MONETARY POLICY
NOMINAL EXCHANGE RATE
OPTION VALUE
POLICY RESEARCH
POLITICAL ECONOMY
RANDOM WALK
REGIME OF TARGET ZONES
RELATIVE PRICES
RETURN
RETURNS
RISK AVERSION
RISK PREMIUM
TRADE FLOWS
TRADE IMPACT
TRADING
VARIABLE COSTS
VOLATILITY
Mundaca, Gabriela
Exchange Rate Uncertainty and Optimal Participation in International Trade
geographic_facet The World Region
The World Region
relation Policy Research working paper ; no. WPS 5593
description Instead of just focusing on the effect of exchange rate levels (undervalued or overvalued exchange rates) on trade, this paper provides an analysis of the effects of exchange rate volatility levels on international trade. Intuitively, an increase in exchange rate volatility leads to uncertainty for agents participating in international trade, and such uncertainty might have a negative impact on international trade flows and participation, thereby reducing the advantages of world-wide specialization. This is especially crucial for countries where exchange rate derivatives markets are not yet well developed and the costs of hedging exchange rate risk are very high. The model here considers optimal decisions about participation in international trade under uncertainty about the exchange rate. The main conclusion is that a high level of exchange rate volatility can deter entrepreneurs from becoming exporters, even though exporting can be highly profitable. For those already participating in international trade, it is opposite: they may, optimally, choose not to leave the market even though staying in this market is highly unprofitable in the short run.
format Publications & Research :: Policy Research Working Paper
author Mundaca, Gabriela
author_facet Mundaca, Gabriela
author_sort Mundaca, Gabriela
title Exchange Rate Uncertainty and Optimal Participation in International Trade
title_short Exchange Rate Uncertainty and Optimal Participation in International Trade
title_full Exchange Rate Uncertainty and Optimal Participation in International Trade
title_fullStr Exchange Rate Uncertainty and Optimal Participation in International Trade
title_full_unstemmed Exchange Rate Uncertainty and Optimal Participation in International Trade
title_sort exchange rate uncertainty and optimal participation in international trade
publishDate 2012
url http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20110316112823
http://hdl.handle.net/10986/3359
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