Exchange Rate Movements On Trade

As the breaking down of Bretton Woods System in 1973, many countries established their own exchange rate system which made the USD loses its power status. The exchange rates are more and more market-oriented. Nowadays, among active world trade and international investment, both the horizon changes and the volatility of exchange rates will have impact on the decision of international exporters and importers.The main purpose of this paper is to investigate the relationship between the exchange volatility and Sweden's exports. Many studies have tested the relationships by different samples or applying different econometric approaches while there is still no consistent conclusion. Therefore, it is necessary we continue the study of this topic. Besides, Sweden held a referendum on 14 September 2003 on whether to adopt the euro. The result of the referendum was a clear vote against adopt the euro. Sweden is expected to do this again in 2010. Being a member of Euro Zone means there will be no exchange volatility between Sweden and other member countries. Seeing from this perspective, to study the relationship is significant to the decision of euro.An Econometric model is adopted here. The dependant variables are Sweden's aggregate exports and exports by commodities respectively. The explanatory variables are REER (real effective exchange rate) and REER's volatility, Sweden's industrial production index and imports of Euro area. In order to investigate if the relationship is sensitive to the aggregate data or bilateral data, we also analyzed the relationship by using the data of five main trade partners of Sweden: USA, UK, Germany, Norway, and Denmark. The results show that, the volatility of REER has no significant impact on either the aggregate export or exports by commodities. The results of five countries also show insignificant effect of exchange volatility on bilateral trade.The paper is arranged as follow: The first chapter will do some research on the previous relevant studies; The second chapter will introduce Sweden's exchange rate system and its foreign trade; The third chapter will analyze the different effect of exchange rate changes on exports theoretically. The fifth chapter is the empirical study. It is divided into two parts. The first part is study about the aggregate export and exports by commodities. The second part is study about the five main trade partners. We conclude in the last chapter.