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Exchange Rate Volatility and International Prices

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  • Robert C. Feenstra
  • Jon D. Kendall

Abstract

We examine how exchange rate volatility affects exporter's pricing decisions in the presence of optimal forward covering. By taking account of forward covering, we are able to derive an expression for the risk premium in the foreign exchange market, which is then estimated as a generalized ARCH model to obtain the time-dependent variance of the exchange rate. Our theory implies a connection between the estimated risk premium equation, and the influence of exchange rate volatility on export prices. In particular, we argue that if there is no risk premium, then exchange rate variance can only have a negative impact on export prices. In the presence of a risk premium, however, the effect of exchange rate variance on export prices is ambiguous, and may be statistically insignificant with aggregate data. These results are supported using data on aggregate U.S. imports and exchange rates of the dollar against the pound. yen and mark.

Suggested Citation

  • Robert C. Feenstra & Jon D. Kendall, 1991. "Exchange Rate Volatility and International Prices," NBER Working Papers 3644, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:3644
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    Cited by:

    1. Muntasir Murshed & Seemran Rashid, 2020. "An Empirical Investigation of Real Exchange Rate Responses to Foreign Currency Inflows: Revisiting the Dutch Disease Phenomenon in South Asia," The Economics and Finance Letters, Conscientia Beam, vol. 7(1), pages 23-46.
    2. Sen, Chitrakalpa & Chakrabarti, Gagari & Sarkar, Amitava, 1981. "Asymmetric Response in Foreign Exchange Volatility under Structural Break," MPRA Paper 26817, University Library of Munich, Germany.
    3. David UMORU & Adaobi S. OSEME, 2013. "Trade Flows and Exchange Rate Shocks in Nigeria: An Empirical Result," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 3(7), pages 948-977, July.
    4. Bouoiyour, Jamal & Selmi, Refk, 2013. "Exchange rate uncertainty and export performance: what meta-analysis reveals?," MPRA Paper 49249, University Library of Munich, Germany, revised Aug 2013.
    5. Olimov, Ulugbek & Sirajiddinov, Nishanbay, 2008. "The Effects of the Real Exchange Rate Volatility and Misalignments on Foreign Trade Flows in Uzbekistan," MPRA Paper 9749, University Library of Munich, Germany.
    6. Philippe Bacchetta & Eric van Wincoop, 1998. "Does Exchange Rate Stability Increase Trade and Capital Flows?," Working Papers 98.04, Swiss National Bank, Study Center Gerzensee.
    7. L. J. Ruland & J.‐M. Viaene, 1993. "The Political Choice Of The Exchange Rate Regime," Economics and Politics, Wiley Blackwell, vol. 5(3), pages 271-284, November.
    8. Manwa, Farai & Wijeweera, Albert & Kortt, Michael A., 2019. "Trade and growth in SACU countries: A panel data analysis," Economic Analysis and Policy, Elsevier, vol. 63(C), pages 107-118.
    9. Agathe Côté, "undated". "Exchange Rate Volatility and Trade: A Survey," Staff Working Papers 94-5, Bank of Canada.
    10. Agathe Cote, 1994. "Exchange Rate Volatility and Trade," International Trade 9406001, University Library of Munich, Germany, revised 28 Jun 1994.
    11. Qian, Ying & Varangis, Panos, 1992. "Does exchange rate volatility hinder export growth? Additional evidence," Policy Research Working Paper Series 911, The World Bank.

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