The Impact of G-3 Exchange Rate Volatility on Developing Countries

Gerardo Esquivel () and Felipe Larrain B.

No 86, CID Working Papers from Center for International Development at Harvard University

Abstract: This paper describes G-3 exchange rate volatility and evaluates its impact on developing countries. The paper presents empirical evidence showing that G-3 exchange rate volatility has a robust and significantly negative impact on developing countries' exports. A one percentage point increase in G-3 exchange rate volatility decreases real exports of developing countries by about 2 percent, on average. G-3 exchange rate volatility also appears to have a negative influence on foreign direct investment to certain regions, and increases the probability of occurrence of exchange rate crises in developing countries. These results imply that greater stability in the international exchange rate system would help improve trade and foreign direct investment prospects for developing countries --and would help prevent currency crises.

Keywords: G-3; Exchange Rate; Developing Countries (search for similar items in EconPapers)
Date: 2002-02
Note: This paper describes G-3 exchange rate volatility and evaluates its impact on developing countries. The paper presents empirical evidence showing that G-3 exchange rate volatility has a robust and significantly negative impact on developing countries' exports. A one percentage point increase in G-3 exchange rate volatility decreases real exports of developing countries by about 2 percent, on average. G-3 exchange rate volatility also appears to have a negative influence on foreign direct investment to certain regions, and increases the probability of occurrence of exchange rate crises in developing countries. These results imply that greater stability in the international exchange rate system would help improve trade and foreign direct investment prospects for developing countries --and would help prevent currency crises.
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Working Paper: THE IMPACT OF G-3 EXCHANGE RATE VOLATILITY ON DEVELOPING COUNTRIES (2002)
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