Dear Scholars,
Would you please share your understanding, and academic and research experiences regarding the effects of Exchange Rate Volatility? What are the main effects that influencing entire balance of economy?
Effect of exchange rate volatility on:
1. Economic growth
2. Currency Demand
3. Exports
4. Imports
5. Energy Price
6. International Flow of funds (including FDI)
7. Foreign aid, debt interest repayments
8. Foreign Remittance
9. Money Exchange Business
10. Bank’s Financial Performance
11. Social Effects (tourist and medical tourist)
12. Social Effects (Education and Academic Tourist)
13. Lifestyle effects or domestic consumption (due to Inflation)
14. De-dollarization tendency
15. Firm-level effects (Garments sector)
This is a complex question. To be able to answer this question adequately, one needs to distinguish between nominal and real exchange rate. to start to answer the many questions you posted, I suggest reading a good intermediate textbook on international economics. I recommend reading International Economics, by Feenstra and Taylor. You will be able to learn about the many financial contracts, such as forward, futures, and option contracts that can be used to hedge against exchange rate risks (volatility). You will also be able to see how volatility in the real exchange rate affects the real economy, such as international trade in goods and services.
Exchange rate volatility can have both positive and negative effects on the economy. On one hand, it can create uncertainty for businesses and investors, which may lead to reduced investment and economic growth. It can also impact international trade by affecting the competitiveness of exports and imports. On the other hand, exchange rate volatility can create opportunities for certain industries, such as tourism and export-oriented sectors, as it may make their products more attractive or competitive in foreign markets. The overall impact depends on various factors, including the country's economic structure, policies, and external trade relationships.
Unpredictability of exchange rate has a significant negative effect on real economic growth, and this can be avoided if policymakers adopt different policies to keep the exchange rate stable.
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