The Impact of Exchange Rate Volatility on International trade in Developing economies

Abstract

This paper examines the relationship between exchange rate volatility, trade, and foreign direct investment (FDI) in eight developing economies from 2005 to 2023. Departing from prior level‑based analyses, it uses year‑on‑year percentage changes to better capture short‑term dynamics and sectoral heterogeneity. Exchange rate volatility is calculated as a three‑year moving average of percentage changes, and exports are disaggregated into four trade‑orientation categories to account for varying import intensity. Results show predominantly negative correlations between volatility and FDI, while sectoral export responses differ by structure: export‑intensive sectors in Brazil benefit from depreciation, whereas India’s import‑dependent sectors often gain from appreciation through lower input costs. Case studies of India’s 2013 taper tantrum, Malaysia’s 1998 peg, and Brazil’s 2013–15 derivative program highlight how financial depth and policy mix shape outcomes. The study addresses a key gap in volatility literature by focusing on developing economies and sector‑specific dynamics.