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1 Document WT/WGTDF/M/22.
2 IMF (2004), Exchange Rate Volatility and Trade Flows - Some New Evidences, Washington D.C., circulated in the WTO as Document WT/WGTDF/W/24.
3 Document WT/WGTDF/M/22.
4 The choice of exchange rate regimes and their macroeconomic implications have been well debated subjects since the collapse of the Bretton-Woods system. A pre-requisite for an examination of this subject is a review of an equally rich literature on the classification of exchange rates regimes - both de facto and de jure. For a review of this branch of the literature (exchange rate regimes and implications), we recommend Qureshi, Mahavash and Charalambos Tsangarides (2010), The Empirics of Exchange Rate Regimes and Trade: Words vs. Deeds, IMF Working Paper WP/10/48.
5 The terms "depreciation" and "devaluation" are used here interchangeably as the fall of the value of a country's currency relative to another currency or to a basket of currencies. The latter term generally refers to the specific case where the currency was previously pegged to a metallic anchor such as gold or to another currency.
6 Document WT/GC/444.
7 In De Grauwe's model, exchange rate variability has two effects on risk-adverse firms: an income effect, whereby the expected reduced utility derived from higher uncertainty of profits leads the firms to increase its sales abroad, and a substitution effect, whereby higher uncertainty deriving from volatile exchange rate would lead the firm to reduce trade. At the highest level of risk aversion, the income effect exceeds the substitution effect.
8 The gravity model used by the IMF performs relatively well empirically, yielding coefficients and estimates in line with expectations deriving from other empirical work, and from economic theory. The coefficient for distance is statistically significant and negative, and the coefficient for GDP and other economic masses is equally statistically significant and positive. Other control variables yield the expected signs and significance.
9 Specifically, when time varying country fixed effects are allowed, which are suggested by theoretical work on the gravity model specification, "the analysis does not reveal a negative association between volatility and trade" (page 55). However, on page 49, it is stated that "a negative effect is still observed when we control for unobservable cultural, economic, historical, geographical and other factors specific to a given pair of countries rather than individual countries.
10 Several papers submitted by WTO members point to the impact of exchange rate shifts on bilateral trade or on the aggregate the trade balance. For example, Rincon (1999) finds that, over the period 1979 to 1995, exchange rate depreciation of the Colombian currency had an important role in the short- and long-term improvement of the Colombian trade balance.
11 In earlier work, though, Rose (1991) had found no evidence of a negative relationship between exchange rates and trade on a set of G-7 countries in the 1980s.
13 Several authors made this point, including among others Bergsten (2007) and Mattoo and Subramanian (2009).
14 Simulations showed that above median-performance French firms in their panel react to a 10 per cent depreciation by increasing destination-specific export prices in euros by some 2 per cent. Below median performance firms kept their prices unchanged. The inverse was true for export volumes. The high performance firms kept their export volumes unchanged while below median performance firms increased their export volumes by 6 per cent in the face of a10 per cent depreciation.
15 The IMF has brought the attention of the Secretariat to several of the studies and references contained in this section.
16 However, for a more pessimistic view of this positive relationship, see Santos Silva and Tenreyro (2010).