Exchange rates, international trade and trade policies

This paper investigates the importance of exchange rates on international trade by analyzing the impact that exchange rate volatility and misalignment have on trade and then by exploring whether exchange rate misalignments affect governments' decisions regarding trade policies. The methodology consists of estimating fixed effects models on a detailed panel dataset comprising about 100 countries and 10 years (2000–2009). The findings of this study are generally in line with those of the recent literature in supporting the importance of exchange rate misalignment while finding that short term exchange rate volatility is generally not a serious concern. This paper also shows evidence supporting the argument that trade policy is used to compensate for some of the consequences of an overvalued currency, especially with regard to antidumping interventions.