CEU Electronic Theses and Dissertations, 2013
| Author | Kliatskova, Tatsiana |
|---|---|
| Title | Exchange Rate Volatility and International Trade: The Role of Financial Development |
| Summary | There is no clear answer on how exchange rate volatility affects trade. Moreover, it might be that in countries with low levels of financial development costs of exchange rate volatility are higher. This paper examines whether the effect of exchange rate volatility on trade depends on the level of financial development of trading partners. To answer the research question I use a panel data of 1560 country pairs over the period of 1996-2010. I divide country pairs into three subsamples based on their level of financial development measured by stock and private bond market capitalization per GDP and private credit per GDP. For the whole sample as well as for each of the subsamples an augmented gravity model with exchange rate volatility as one of the explanatory variables is estimated. The results suggest that while short-term exchange rate volatility does not influence trade, the effect of long-term exchange rate volatility on trade is positive for country pairs with a high level of financial development and it is negative for country pairs with a low level of financial development. In addition, extreme long-term exchange rate volatility negatively affects trade for country pairs where at least one trading partner has a low level of financial development. These findings argue that development of financial sector should be one of the priorities in economic policy for countries lagging behind. In addition, from the prospects of trade growth, flexible exchange rate regimes are beneficial for countries with high levels of financial development. At the same time, choice of exchange rate regimes for trade promotion with or between countries with low levels of financial development requires further investigation. |
| Supervisor | Miklos Koren |
| Department | Economics MA |
| Full text | https://www.etd.ceu.edu/2013/kliatskova_tatsiana.pdf |
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