The Effect of Exchange Rate Volatility on Trade and Employment: A Brief Review of the Literature

by HODGE, D., 2005
Research Report, Employment Growth & Development Initiative, Human Sciences Research Council

This paper forms part of the Human Sciences Research Council’s project on exchange rates and employment (MACRO006), which seeks to understand the impact of exchange rate fluctuations on employment in South Africa. The explanation of the factors determining the volatility of exchange rates is interesting, but from the policy perspective of this project, not an end in itself. The more important questions relate to the effect of exchange rate volatility on the real economy, and specifically on international trade and employment. Although for the most part these concerns have been researched separately, the findings in one area have implications for research in the other. For example, should the evidence suggest that exchange rate volatility has only a small effect on international trade, this would weaken the case for a strong effect on employment, since changes in the trade balance are the channel through which changes in exchange rates are transmitted to growth and employment. The literature on both areas of research is sizeable. This introduction to the literature relies on published surveys of the main work and findings in each area. However, where especially pertinent issues are examined, some individual papers are discussed.