The effect of exchange rate volatility on international trade in East Asia

In this paper, we empirically investigate the relationship between exchange rate volatility and international trade, focusing on East Asia. Our findings are summarized as follows: first, intra-East Asian trade is discouraged by exchange rate volatility more seriously than trade in other regions. Second, one important source of the discouragement is that intermediate goods trade in international production networks, which is quite sensitive to exchange rate volatility compared with other types of trade, occupies a significant fraction of East Asian trade. Third, the negative effect of the volatility is greater than that of tariffs and smaller than that of distance-related costs in East Asia. J. Japanese Int. Economies xxx (xx) (2009) xxx-xxx. Inter-disciplinary Studies Center. Institute of Developing Economies, 3-2-2 Wakaba, Mihama-ku, Chiba-shi, Chiba 261-8545, Japan; Faculty of Economics, Keio University, 2-15-45 Mita, Minato-ku, Tokyo 108-8345, Japan. (C) 2009 Elsevier Inc. All rights reserved.