EXCHANGE-RATE VARIABILITY AND THE LEVEL OF INTERNATIONAL-TRADE

Theoretical research has shown that under reasonable assumptions exchange rate variability ought to depress the level of trade. This paper builds a theoretical model designed to exaggerate the negative effect of exchange rate variability on trade in order to calibrate an upper bound to the potential size of this effect. Numerical analysis demonstrates that exchange rate variability of the magnitude currently observed among industrial countries has an insignificant effect on the level of trade. This result is robust with respect to a wide range of parameter values and with respect to reasonable extensions of the model.