Economics Journals| Applied Economics

The IUP Journal of Applied Economics

Exchange Rate Volatility: A Review of Global Experience

Article Details

Pub. Date	: Oct, 2023
Product Name	: The IUP Journal of Applied Economics
Product Type	: Article
Product Code	: IJAE041023
Author Name	: Gitumoni Rajbongshi and P Srinivasa Suresh
Availability	: YES
Subject/Domain	: Economics
Download Format	: PDF Format
No. of Pages	: 21

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Abstract

Exchange rate volatility is the most important determinant influencing a country's economic health. A rise in exchange rate risk increases transaction costs and reduces the gains accruing from international trade. The economy of a country is closely dependent on its foreign exchange system. This paper reviews various research studies conducted in recent years on factors responsible for exchange rate volatility and its impact on exports, international trade, trade volumes, FDI, etc. The review reveals that government expenditure, changes in supply of money, domestic and external debts, trade, openness, interest rates, domestic and foreign money supply, inflation, changes in terms of trade, bank intervention, productivity, etc. are some of the factors that make exchange rate volatile. Studies pertaining to relationship between exchange rate volatility and trade present ambiguous views. The review reveals that earlier studies found an insignificant and negative relationship, while recent literature showed a positive relationship between exchange rate volatility and trade, due to advancement in the estimation techniques adopted, like autoregressive distributive lag (ARDL) model, error correction models, etc. The review concludes that there is no unanimity in results, as the magnitude of the effect depends on a number of factors and varies from country to country.

Introduction

Exchange rate volatility is an important determinant of a country's economic health. It acts as a link between domestic and overseas markets for transactions of goods, services and financial assets. The policies of a country's foreign exchange also play a vital role in world's investment decisions. The breakdown of the Bretton Woods system in 1970 led to the flexible exchange rate system which is highly volatile in nature. Vital macroeconomic indicators such as interest rates, trade, gross domestic product (GDP), stock market, balance of trade, unemployment, etc. have been affected in various ways due to flexible exchange rate, for which various theoretical and empirical investigations are required. Volatility in exchange rate can lead to currency appreciation and depression, making investment decisions more

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