Exchange Rate Volatility

Review of Literature:
A large number of studies have examined Trade and exchange rate volatility under two broad frameworks. An academic study on the Exchange rate volatility on trading is very important and pertinent in the context of its structural existence. In the present study, following reviews are available in the area of exchange rate volatility with Macroeconomic variables. The research studies conducted in exchange rate volatility are related mostly to different macroeconomic variables.
Michael D McKenzie and R.M.I.T Melbourne (1999) examined The Impact of Exchange Rate Volatility on International Trade Flows, which remains unresolved at both theoretical and empirical level. This paper surveys the vast literature in the area in an

Evidence from gravity model Intra-South Asian Association for Regional Cooperation (SAARC) trade appears to be very small compared to other existing regional blocks. This might be because of normal outcome or because of unexplored trade opportunity. It then increased trade within this region might be welfare improving. This study attempts to make a formal analysis of these issues and estimates a gravity model of international trade to examine whether intra-SAARC is lower or higher than what is predicted by an economic model. This gives an idea about the structure of comparative advantage in the SAARC countries that helps to explain why intra-SAARC trade is low and how trade among them can be increased. It also helps us to understand the possibility of trade creation and trade diversion effect resulting from South Asian Preferential Trading Arrangements among SAARC countries. Whereas the gravity model has been extensively used to measure bilateral trade among countries, they have, to the best of my knowledge, never been used to measure intra-SAARC trade. Our gravity model results suggest that SAARC member countries are yet to achieve trade-creating benefits. Appropriate policies need to be formulated for more regional integration. Liberalization of trade in SAARC countries offers significant gains for all the economies in the region. Efforts should be made to liberalize border trade and strengthen bilateral trade

Hegerty (2007) examined Exchange rate volatility and trade flows This paper examined the vast empirical literature, up to 2005, to assess the main trends in modeling and estimating this trade flows at the aggregate, bilateral, and sectoral levels.The increase in exchange-rate volatility since 1973 has had indeterminate effects on international export and import flows. Although it can be assumed that an increase in risk may lead to a reduction in economic activity, the theoretical literature provides justifications for positive or insignificant effects as well. Similar results have been found in empirical tests. While modeling techniques have evolved over time to incorporate new developments in econometric analysis, no single measure of exchange-rate volatility has dominated the literature. Originality/value – An argument put forward by the opponents of the floating exchange rates is that such rates introduce uncertainty into the foreign exchange market, which could deter trade flows. However, a theoretical argument is put forward by some to show that uncertainty could also boost trade flows if traders increase their trade volume to offset any decrease in future revenue due to exchange rate