IMF Survey : Exchange Rates Still Matter For Trade
IMF News, September 28, 2015
Source details
- Canonical URL
- IMF Survey : Exchange Rates Still Matter For Trade
Other formats
Bibliographic details
- Published: September 28, 2015
Key findings on exchange rates and trade
- A 10 percent real effective exchange rate depreciation comes with a rise in real net exports of 1.5 percent of GDP, on average, with substantial variation around this average.
- Much of the adjustment in net exports occurs within the first year, although it takes some years for effects to fully materialize.
- The rise in exports following depreciation tends to be greatest for economies with slack in the domestic economy and financial systems operating normally.
- There is little sign of a generalized weakening or breakdown in the relationship between exchange rates and total exports and imports across broad country samples, including Asia and Europe.
- A notable exception is Japan, where export growth has been weaker than expected despite substantial yen depreciation; Japan-specific factors cited include a sharp acceleration in production off-shoring since the global financial crisis and the 2011 earthquake, which created uncertainty about energy supply.
- Trade in intermediate products tied to global value chains shows some weakening in its sensitivity to exchange rates, particularly for economies that have substantially increased participation in global value chains (examples cited: Hungary, Romania, Mexico, and Thailand).
- Despite any weakening for intermediate goods, global-value-chain-related trade has increased only gradually through the decades and appears to have decelerated; the bulk of global trade still consists of conventional trade.
- Because exports and imports have become larger shares of GDP, even a weaker relation between exchange rates and trade volumes could imply exchange rates matter more for trade measured as percent of GDP than before.
Recent currency movements and redistributive effects
- Recent changes noted:
- The U.S. dollar is up more than 10 percent in real effective terms since mid-2014.
- The yen is down more than 30 percent since mid-2012.
- The euro is down by more than 10 percent since early 2014.
- Currency movements since January 2013 imply a shift of real net exports:
- From the United States and economies whose currencies move with the dollar
- To the euro area, to Japan, and to economies whose currencies move with the euro and the yen
- These direct effects indicate sizable cross-country redistribution of net exports, though overall export and import changes also reflect fundamentals driving exchange rates (demand growth at home and in trading partners, and movements in commodity prices).
Historical perspective and implications for policy
- Historical precedent: In the 1980s, apparent disconnects between exchange rates and trade (after the 1985 Plaza Accord) dissipated by the early 1990s as trade balances adjusted largely in line with conventional models.
- The study examines advanced and emerging market and developing economies over the past three decades, using standard trade equations and analyses of historical cases of large exchange rate movements.
- Policy implications highlighted:
- Exchange rate adjustments can still help to reduce trade imbalances.
- Exchange rate changes continue to have strong effects on export and import prices, with implications for inflation dynamics and the transmission of monetary policy.
- A disconnect between exchange rates and trade would complicate policymaking by weakening a key channel for monetary policy transmission and complicating the reduction of trade imbalances via relative trade price adjustment.
Study and authorship
- The study is presented in the October 2015 World Economic Outlook analysis.
- Authors: Daniel Leigh (team lead), Weicheng Lian, Marcos Poplawski-Ribeiro, and Viktor Tsyrennikov, with support from Olivia Ma, Rachel Szymanski, and Hong Yang.
- Publication date on IMF Survey: September 28, 2015.
IMF Survey : Exchange Rates Still Matter For Trade — IMF Research (September 28, 2015).