Relationship Between Exchange Rate Volatility And Trade

The United States of America’s strength is defined by five key events in history. In the following order: the Colombian Exchange, Declaration of Independence, Louisiana Purchase, Mexican-American War and Civil War are considered strong evidence that America can compete with older nations. In addition, these events prove that America is self sufficient and capable of making it’s own decision as illustrated in the Declaration of Independence. Not only has the United States shown it’s competitors that it can successfully trade, but is able to also eliminate problems as they arise. From past to present, every occurrence in American history will continue to internationally affect the future generations.

However, speculation can only be expected to smooth exchange rate movements if underlying economic processes are relatively stable. If there is a great deal of uncertainty over future government actions and their economic impact, expectations will not be strongly held. Thus expectations can change dramatically from day- to-day, leading to rapidly fluctuating exchange rates.

There has been a fundamental shift in the world’s economy where national economies were once self contained, now cross border business activities and economies are much more inter-dependent on each other.

Even though the concept of globalization is complex, it is no longer deniable that we live in a globalized world. Thanks to the new technologies of communication, we are well informed about our closest and farthest neighbors across the entire world. Our nations and, indirectly we, the citizens, are all impacted by international matters and our nation’s foreign policy choices. Generally, globalization has affected many nations in various ways; economically, politically, and socially. It’s a fast integration and association of various nations, which shapes the world affairs on a global level. The concept of globalization is evident in the many difficult challenges that come with it, involving our cultural differences, and the regulating challenge of globalizations. The phenomenon of globalization has affected many cultures around the world, resulting in the Americanization of other nations.

In today’s fast paced world, many would say that globalization is electrifying, bringing with it worldwide advancement and opportunities as well as economical business growth across nations. Many would also suggest that it has opened doors to the larger demographics of information and communication that crosses geographic, social and cultural boundaries. As a result of globalization, the worldwide market has expanded; bring together companies, workers, experience, knowledge and consumers, making their products easily attainable in different countries and regions. Take for instance the automobile industry, many American cars are built in other countries such as Japan but assembled here in America. Some would consider this as a partnership between both countries. The automobile company is providing employment and advancement to both countries by sharing the designing, management and production process and execution of automobiles which would be sold mainly in the United States. Another great result of globalization is the ability to unify medical and political resources during trying times such as war and to combat the spread of infectious diseases. In many incidents throughout history all participant nations medical and military armed forces have unified with other nations to protect each other 's country, investments and relationships which, if infiltrated could weaken or collapse the world’s economy.

“To succeed, we must face the world as it is” (Obama, 2010, p.1). Globalization has resulted in interconnecting the world in such a manner that was unimaginable even two decades ago. No longer can any state, nation, or people expect to remain an island. Indeed, as we are interconnected, so too are our fates. If the United States is to ensure security and prosperity for her citizens now and for future generations, we must clearly acknowledge that part we play in the continuum of shifting word powers and peace. We must recognize that although we are the world’s leading power, we are not the sole possessor and arbiter of influence.

An important issue in this topic is how to choose the appropriate technique to estimate the exchange rate volatility. However, wide variety of measures have been discussing in the literature, but there is no right or wrong measure of exchange rate volatility. Mckenzie (1999) provides a brief over-view of different methods to measure exchange rate volatility, such average absolute difference between the previous forward and current spot rate, variance of the spot exchange rate around its trend, absolute percentage change of the exchange rate and the moving average of the standard deviation of the exchange rate. A moving standard deviation of nominal or real exchange rate seems to be the most commonly used method in the empirical literature. Hence, we will construct the moving average standard deviation of the monthly real exchange rate volatility with the same spirit as Serenis and Tsounis (2014) and a moving standard deviation of real exchange rate can be expressed as:

Today, almost all of us are aware that our lives are being shaped by an interconnected world economy of cross-border flows of trade, finance and technology. In our hearts, we know that there is no going back.”

Among various subjects in the field of international trade and monetary policy, the relationship between real exchange rate and trade balance is one of the most popular topics, attracting extensive studies in last couple decades. Although a lot of efforts have been made, international trade economists have yet come up with a convergence point in theory to explain the moving direction of trade balance as the result of currency depreciation or appreciation (Qiao, 2005). Empirical studies also show divergence results of this topic. (Koray and McMillins, 1998). Moreover most of the study has been conduct with economy with higher level

We have analyzed data for last 13 years, from 2000 to 2013.The paper covers theoretical aspects of exchange rate fluctuations and trade. Our study the theoretical evidences and is consistent with past available researches.

The link between trade performances and exchange rate movements has been the matter of many practical studies. The literature review explains that the set of results, often in similar countries, might stem from practical proof being removed from diverse time periods and not the same methodologies. First, it clarifies whether exchange rate instability impedes trade flows. Second, it shows if the exchange rate depreciation develops the trade balance (J-curve effect).

Exchange rate represents the external value of a currency. Changes in exchange rates may affect the relative position of a country in the international trade. Politicians and economists concern about exchange rate variability for lots of reasons, among which that the exchange rate variability discourages trade comes first. However, a large empirical literature on this issue does not confirm a significant effect of exchange rate on the volume of trade [1]. Instead other variables such as employment should be much more important from a practical point of view, for it is closely related to people’s livelihood.

Living in the 21st century, globalization has become an inseparable influence on my life and surroundings. Defined as, “ the integration of economic, political, and cultural systems,” this concept of international blending has interwoven itself into our modern structure of operation by influencing our daily interactions with business, trade, foreign affairs, and social customs. Globalization has made the world become a global marketplace for items, ideas, and culture unimpaired by national boundaries. In many ways because of globalization the world has seemingly grown “smaller” by connecting nations and their people.

Along with the twenty-first century tagged an interconnected and globalized world, consociated by instantaneous worldwide communication and the free dissemination of information. With this new era of technology, economic policies of nation-states have become so interdependent that most nation-state economies would be crippled without their respective international trading partners. As such, one may wonder if an introspective national policy is appropriate, as argued for by the source. For example, one may contend that international cooperation inevitably results in unequitable compromise, with the more powerful nation-states forcing developing countries into partisan trade-deals. This argument, however, does not take into account the

Focusing on impact of exchange rate, Siregar and Rajan (2002) study the impact of exchange rate volatility in Indonesia’s trade with