rate movements still have sizable effects on exports and imports, according to
new research from the International Monetary Fund (IMF).
Recent sizable movements in the currency
markets have led to debates regarding their effects on trade.
The US dollar is up more than 10% in real
effective terms since mid-2014. The yen is down more than 30% since mid-2012
and the euro by more than 10% since early 2014. Brazil, China and India have
also seen unusually large changes in their currency values.
The IMF report identifies two schools of
thought regarding the impact of these currency moves. It states that while some
economists predict that they will have a strong effect on exports and imports based
on conventional economic models, others argue that the increasing fragmentation
of production across different countries means that exchange rates matter far
less than they used to for trade, and may have disconnected altogether.
This is an important debate, says Daniel
Leigh, deputy division chief in the IMF research department, and lead author of
“A disconnect between exchange rates and
trade would complicate policymaking. It could weaken a key channel for the
transmission of monetary policy, and complicate the reduction of trade
imbalances, as in the case of imports exceeding exports, via the adjustment of
relative trade prices,” he says.
The report notes
about a disconnect between exchange rates and trade are not new.
Will History Repeat Itself?
Back in the 1980s, the US dollar depreciated,
while the yen appreciated sharply after the 1985 Plaza Accord, but trade
volumes were slow to adjust. Some commentators then suggested a disconnect
between exchange rates and trade. But by the early 1990s, US and Japanese trade
balances had adjusted, largely in line with the predictions of conventional
The question, according to the IMF
researchers, is whether this time is different, or whether the apparent
disconnect between exchange rates and trade will once again dissipate.
By examining the experience of both advanced
and emerging market and developing economies over the past three decades, a
broader sample than is typically examined when studying this issue, Leigh claims
to have identified a strong link between exchange rate moves and trade.
“We find that, on average, a 10% real effective
exchange rate depreciation comes with a rise in real net exports of 1.55 of
GDP,” says Leigh, noting that there is substantial variation around this
average (Chart 1). “Although it takes some years for the effects to fully
materialise, much of the adjustment occurs in the first year,” he says.
Reducing Trade Imbalances
The study also finds little sign of a
breakdown in the relationship between exchange rates and exports and imports.
Importantly, the IMF study says that the rising
size of exports and imports in GDP means that even a weaker relation between
exchange rates and trade volumes could be consistent with exchange rate
mattering more for trade in per cent of GDP than before.
The IMF claims that these results are
important because they mean that recent currency movements are shifting net
exports from some economies to others, but adds that this only speaks to the
direct effects of exchange rate movements.
Overall changes in exports and imports also
reflect shifts in the underlying fundamentals driving exchange rates
themselves. These include demand growth at home and in trading partners, and
movements in commodity prices.
But, in terms of the direct effects, the
currency movements since January 2013 point to a shift of real net exports from
the US 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 (Chart
“For policymakers, a key implication of these
results is that exchange rate adjustments can still help to reduce trade
imbalances,” says Leigh.