Abstract
The purpose of this study is to assess under what conditions exchange rate volatility generates a positive effect on an exporting firm’s labour demand. As the exchange rate volatility increases, so does the value of the export option, provided that firms are flexible with respect to international trade. Higher volatility increases the potential gains from trade and can increase the demand for labour. The firm’s trade flexibility can be interpreted as a real hedging strategy when financial markets are incomplete. In many newly industrializing countries and emerging economies financial markets are imperfect or risk sharing markets are just starting to develop at a rather slow pace.
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Notes
See for example Battermann et al. (2008).
De Grauwe (2007) argues that within the EU the elimination of transaction costs is another source of gains in economic efficiency arising from a single currency, and it is certainly the most visible gain from the monetary union.
For an explanation see e.g. Sandmo (1971a).
In the standard theory of a price taking firm under certainty the profit function is usually assumed convex. A higher output price makes the firm adjust its optimal output policy, see e.g. Varian (1992).
The exchange rate process can be interpreted as a mean reverting stochastic process. The bulk of literature dealing with forward pricing and optimal hedge decisions focusses on evolutions expressed by standard geometric Brownian motion (GBM). The problem with GBM is that in many cases price changes are not independent and prices tend to return to an average level. For a discussion, see Broll et al. (2010).
Considering the case of a normal good, the income effect is clearly positive but nothing can be said about the absolute values of the single effects and hence the sign of the net effect.
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Acknowledgements
We would like to thank our anonymous referee for very constructive and helpful comments. Furthermore we thank the editor of this Journal (P.J.J. Welfens) and Carsten Eckel for helpful discussions.
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Broll, U., Hansen-Averlant, S. Exchange rate volatility, international trade and labour demand. Int Econ Econ Policy 7, 423–436 (2010). https://doi.org/10.1007/s10368-010-0150-3
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DOI: https://doi.org/10.1007/s10368-010-0150-3