Trade and Exposure

Countries have historically rationalized various fixed-exchange-rate regimes with the argument that trade would be adversely affected by exchange-rate volatility. According to this view, uncertainty about exchange-rate movements makes firms less likely to export or import goods and, to the extent that firms engage in trade, makes them incur exchange-rate risk. In this paper, the relationships among exchange-rate movements, firm value, and trade are examined. Specifically, the paper tests whether firm-level exchange-rate exposure is related to trade flows.