Proceedings of the 52nd International Academic Conference, Barcelona

THE IMPORTANCE OF EXCHANGE RATE STABILITY FOR EXPORT GROWTH

ALEKSANDRA ĐORĐEVIĆ ZORIĆ

Abstract:

Exchange rates movements can have significant effects on different economic variables, affecting the overall macroeconomic stability of the country. Consequently, economic policymakers and researchers continuously monitor and analyze the diverse effects that exchange rate fluctuations can cause. Given that exchange rates have one of the key roles in the country's trade activities, and having in mind the importance of international trade for market economies, the effect of exchange rates on trade has become a highly relevant issue (especially after the collapse of the Bretton Woods system), both in the theory of international economics and for economic policymakers. Usually, the analysis of the effects of exchange rate movements on trade implies the analysis of exchange rate volatility. However, another important aspect of the influence of exchange rates on trade should not be ignored. In addition to the standard interest in examining the impact of the exchange rate volatility on trade, in recent literature increasing importance is given to the analysis of the effects of the exchange rate misalignment. As Bleaney (1992) points out, short-term volatility measures have to be complemented by longer-run measures that better account for persistence and mean-reversion, which can characterize exchange rate changes. In this respect, compared to volatility, a greater source of uncertainty for participants in international trade can be the exchange rate misalignment (Côté, 1994). In addition, the global external imbalances at the beginning of the 2000s, as well as the global economic crisis, have raised the issue of the effects of undervalued currencies on trade partners. Bearing previously in mind, the analysis of misalignment is of great importance. Given that, unlike volatility, the literature dealing with the examination of this aspect of the influence of exchange rates on trade is limited so far, the aim of this paper is to shed light on the importance of the equilibrium exchange rate for export growth, analyzing the theoretical and empirical literature dealing with this issue.

Keywords: exchange rates, international trade, export, exchange rate misalignment

DOI: 10.20472/IAC.2019.052.069

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