Trade effects of exchange rates and their volatility: Chile and New Zealand
2012
Huchet-Bourdon, Marilyne | Korinek, Jane
Trade deficits and surpluses are sometimes attributed to intentionally low or highexchange rate levels. The impact of exchange rate levels on trade has been much debatedbut the large body of existing empirical literature does not suggest an unequivocally clear picture ofthe trade impacts of changes in exchange rates. In addition, much of theevidence on this subject considers currencies of large economies, and overwhelmingly theUnited States.This study examines the impact of exchange rates and their volatility on trade flowsin two small, open economies Chile and New Zealand with three major tradingpartners, in two broadly defined sectors agriculture on the one hand and manufacturingand mining on the other. It finds that exchange volatility impacts trade flows inthe small, open economies more than was found for larger economies. Findings do not clearlyindicate the direction of the impact, i.e.whether this volatility increases or decreases tradein all countries and sectors. Exchange rate levels, on the other hand, affect trade in bothagriculture and manufacturing and mining sectors although their magnitude differsdepending on the trading partner and sector. Moreover, this study indicates that adepreciation in the exchange rates in Chile and New Zealand would not lead to a strongchange in their trade balances with three main trading partners across the board.
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