Exchange Rate Fluctuations, Currency Invoicing, and International Trade

摘要

Economic intuition suggests that real currency depreciation should lead to long run improvement in a country's trade balance. The short run implications of real depreciation are relatively unknown. The current literature suggests that the short run relationship between trade and real exchange rates is country-specific. This literature has not explored if product and trading partner characteristics play a role in this relationship. This dissertation explores how heterogeneity in trade influences the responsiveness of trade to real exchange rate fluctuations. To my knowledge, this is the first set of papers exploring this heterogeneity.The first paper of this dissertation explores heterogeneity with U.S. commodity-level trade data. Trade responsiveness to real fluctuations varies across product and trading partner characteristics. I find no evidence of long run gains in trade following real depreciation, suggesting that currency manipulation policies meant to improve a country’s trade balance may have no effect on trade in the long run.Prices in international trade contracts with U.S. firms are largely invoiced in U.S. dollars. However, the current literature suggests that the currency in which these prices are set should affect the relationship between trade and real exchange rates in the short run. The second paper of this dissertation explores the implications of currency invoicing patterns using Japanese commodity-level trade data. I find that the response of trade to real fluctuations may differ in the short and long run across product and trading partner characteristics. I also find that the response of trade in the long run may be correlated with comparative advantage.The third paper of this dissertation explores the implications of foreign exchange market liberalization in Japan following the Asian Financial Crisis. I find that liberalization, coupled with financial market reforms, resulted in trade being less responsive to real fluctuations. I also find no evidence of long run trade balance improvement before or after liberalization and that the reform may have eliminated temporary short run gains, suggesting that currency manipulation policies may have no effect on short or long run trade.