https://ijmri.de/index.php/jmsi
volume 4, issue 5, 2025
1292
IMPACT OF EXCHANGE RATE ON FOREIGN TRADE VOLUME
Khakimov Boburbek Akmaljon ugli
Senior Lecturer, Department of Economics
and Tourism, Oriental University, Tashkent
Abstract:
This study examines the impact of exchange rates on foreign trade volume for seven
well-developed European countries during the period of 2009–2019. To investigate the
relationships, regression analyses were conducted using Ordinary Least Squares (OLS) and
Autoregressive Distributed Lag (ARDL) methods with STATA-14 software. Empirical evidence
from trade between the USA and Germany during 1965–1975 indicates that exchange rate
uncertainty significantly impacts prices but does not have a notable effect on trade volume.
Usually, logarithmic transformations are utilized to simplify statistical analysis, enhance
interpretability, and mitigate potential problems. As international trade continues to grow,
regulatory practices that might restrict trade are also increasing. One such obstacle is exchange
rate volatility, which directly and indirectly affects trade activities. Exchange rate fluctuations
can impact trade relations and a country’s trade balance. One finding of this study is that changes
in monetary policy can significantly affect trade activities, particularly in the long-term
perspective. Typically, the effect on exports appears promptly, while import levels respond over
a longer duration. The research also analyzes the relationship with inflation.
Keywords:
Exchange rate, trade, COVID-19 pandemic, OLS method, Ramsey Reset test,
Breusch-Pagan test.
1.
Introduction.
Exchange rate fluctuations are directly influenced by monetary policy and governmental actions.
The recent example is the COVID-19 pandemic, which significantly increased government
intervention across economic and social sectors. The higher the number of confirmed cases, the
more stringent governmental responses become, which significantly impacts exchange rate
volatility. Conversely, economic policies undertaken during the pandemic, such as fiscal
measures, income support, and aid packages, tend to mitigate exchange rate volatility (Feng,
Yang, Gong, and Chang, 2021)[1].
Currently, many factors affect international trade, including tariffs, various trade policies, and
government actions aimed at stimulating national investments and trade. Economic unions such
as the European Union seek to enhance international trade by liberalizing capital flows and
reducing restrictions and taxes among member states. However, capital exchange rates also
considerably impact this issue. The exchange rate is strongly related to competitive financial
markets and international trade. This can have both negative and positive effects, but creating
conditions that support competitiveness is essential (Toderascu and Firtescu, 2018)[2].
The exchange rate is defined as the price of one country's currency expressed in another
country's currency[3]. There are flexible (floating) and fixed types of exchange rates. In currency
trading practices, currency is sold at a higher exchange rate (selling rate) and bought at a lower
rate (buying rate). The difference between these two rates constitutes the revenue banks generate
from currency trading. Officially increasing the exchange rate (revaluation) encourages capital
outflows from the country and facilitates imports by making foreign currencies cheaper. Official
depreciation (devaluation) typically arises when a country experiences significant deterioration
https://ijmri.de/index.php/jmsi
volume 4, issue 5, 2025
1293
in its trade and balance of payments and depletion of currency reserves. Uzbekistan's Central
Bank regularly publishes foreign currency exchange rates against the Uzbek sum each week,
considering money supply and inflation dynamics for accounting and customs duties[4]. As of
April 21, 2024, the official exchange rate of 1 USD to Uzbek sum was 12,697 sums[5]. In
Uzbekistan, foreign currencies, primarily USD, can currently be bought or sold in 31 banks,
except TBC Bank and Apelsin Bank[6].
General wisdom and uncertainty can hinder trade; however, we argue that uncertainty might
enhance trade in a simple general equilibrium model with information frictions. Increased
uncertainty in equilibrium boosts the average profit differential obtained from foreign trade. This
suggests that trade can either increase or decrease due to uncertainty, depending on preferences.
Under general conditions, we characterize the significance of these forces using statistical
approaches. Trade, in part, generates value by offering mechanisms for risk distribution, with
optimal risk sharing achieved when neither party has complete information[7].
Theoretical impacts of exchange rate risk on equilibrium prices and quantities are analyzed using
differential models representing risk on both the import demand and export supply sides[8].
Empirical evidence from the trade between the USA and Germany during 1965–1975 shows that
exchange rate uncertainty significantly affects prices but not trade volume. This price effect
supports previous survey results regarding currency denominations in export contracts,
indicating that most trade occurs in the exporter’s currency, with some exceptions in U.S.
imports.
2.
Methodology.
Generally, logarithmic transformations are utilized in statistical analyses to simplify, streamline,
and prevent potential issues. An advantage of analyzing logarithmic values is that changes can be
easily interpreted as percentages. Therefore, using logarithmic values from World Bank
statistical data is considered appropriate.
�����
��
= �
0
+ �
1
× ���ℎ����
��
+ �
��
Variables introduced into the model include trade volume, representing business activity. This
indicator is presented in the World Bank database for each country during the observed years.
The variable's STATA command name is “lnt” (log of trade), chosen for ease of use and clarity
in STATA results. Trade is the main dependent variable in the model.
Exchange rate ("lne") is considered as an explanatory variable influencing business activity.
Exchange rates from the World Bank database are used.
Descriptive statistics of these variables are provided in Table 1.
Table 1. Descriptive statistics of variables
Variable
Obs
Mean
Std. Dev.
Min
Max
savdo
77
4.258
.489
3.194
5.091
kurs
44
4.532
.103
4.24
4.668
To assess normality and distribution characteristics of data sets, histograms were generated and
compared with normal distribution curves.
Tashqi savdo uchun sarflangan mablag`lar o`rtacha qiymati 4.258, standart deviasiya esa 0.103ni
tashkil qiladi.
https://ijmri.de/index.php/jmsi
volume 4, issue 5, 2025
1294
0
.5
1
D
en
si
ty
3
3.5
4
4.5
5
lnt
Diagram 1. Normality of trade indicators
Scatter plots demonstrate initial assumptions about economic relationships between primary
indicators.
3
3.
5
4
4.
5
5
ln
t
4.2
4.3
4.4
4.5
4.6
4.7
lne
Diagram 2. Impact of Exchange Rate on Foreign Trade Volume.
According to correlation analysis, a positive economic relationship exists between trade and
exchange rates, with a correlation coefficient of 0.322.
Table 2. Correlation matrix of variables
Variables
(1)
(2)
(1) lnt
1.000
(2) lne
0.322
1.000
3.
Results:
In the regression model, there is a single independent variable (random variable), and attention is
given to its indicators. Regression analysis results are:
https://ijmri.de/index.php/jmsi
volume 4, issue 5, 2025
1295
- F-value of the model is 14.719, significant at Prob>F = 0.000, indicating a statistically
significant relationship.
- Exchange rate ("lne") coefficient is 1.279, significant (p=0.047).
- Constant value (cons) is not significant (p=0.361).
Table 3. OLS linear regression results
lnt
Coef.
St.Err.
t-
value
p-
value
[95%
Conf
Interval]
Sig
lne
1.279
.624
2.05
.047
.018
2.54
**
L
-1.136
.241
-4.71
0
-1.624
-.648
***
Constant
2.864
3.097
0.92
.361
-3.395
9.123
Mean dependent var
4.221
SD dependent var
0.538
R-squared
0.424
Number of obs
43
F-test
14.719
Prob > F
0.000
Akaike crit. (AIC)
49.944
Bayesian crit. (BIC)
55.227
*** p<.01, ** p<.05, * p<.1
These results indicate that a one-unit increase in the exchange rate brings about a benefit of
1.279 units for foreign trade. Ensuring the absence of heteroscedasticity issues in the model is
critically important; therefore, the Breusch-Pagan heteroscedasticity tests were conducted.
Table 4. Breusch-Godfrey Autocorrelation Test
Number of gaps in sample:
21
Breusch-Godfrey
LM
test
for
autocorrelation
chi2
df
Prob>Chi2
1.697
1
0.193
Breusch-Godfrey test indicates autocorrelation in the case of p-value of the test being smaller
than 0.05. The p-value of our case, which is 0.193, indicates no autocorrelation. This implies that
the model goes to having BLUE coefficients.
Table 5. Ramsey’s RESET Test
Ramsey RESET test using powers of the fitted values of lnt
Ho: model has no omitted variables
F(3, 37) =
2.40
Prob > F =
0.0834
The Ramsey’s RESET test was conducted to assess the presence of omitted variables in the
model. According to the test results, no omitted variables were detected in our model. The results
were shown in Table 5, indicating that the probability value exceeded 0.05.
Table 6. Breusch-Pagan Test for Heteroscedasticity
Breusch-Pagan / Cook-Weisberg test for heteroskedasticity
https://ijmri.de/index.php/jmsi
volume 4, issue 5, 2025
1296
Ho: Constant variance
Variables: fitted values of lnt
chi2(1)
= 0.69
Prob > chi2 = 0.4046
To verify the abscence of heteroscedasticity issues in the model, the Breusch-Pagan test was
performed. According to the results obtained, the model is free from heteroscedasticity problems
(Table 6).
4.
Xulosa.
This research investigates the impact of the exchange rate on foreign trade volume for well-
developed countries such as Malaysia, Thailand, Turkey, Spain, Germany, French Polynesia, and
Japan over the period of 2009–2019. To examine these relationships, regression analysis was
conducted using the Ordinary Least Squares (OLS) method in the STATA-14 software.
Over the past decades, numerous empirical studies have been conducted on various theoretical
bases. These studies have shown that exchange rate volatility can have positive, negative, or no
effect at all on international trade volume. Furthermore, studies typically analyze the influence of
both the level and volatility of the exchange rate on trade using either a single equation or a set
of equations. Results differ significantly depending on various factors, including the period under
consideration, the measurement of volatility, and whether the effects were examined over the
short-term or long-term, as well as whether the analysis was conducted at the aggregate, sectoral,
or product level.
Additionally, research focusing on various sectors indicates that trade in certain products
responds positively to exchange rate fluctuations, while others show negative responses,
highlighting that the specific impact is highly dependent on the composition of exported and
imported goods. In summary, the literature on this topic reveals that many studies find negative
impacts of exchange rate fluctuations on trade, while others find no significant impact at all. It
has also been observed that, in the long term, specific sectors such as agricultural exports are
negatively impacted by exchange rate volatility. Furthermore, short-term studies have found that
exchange rate fluctuations significantly affect both exports and imports.
Overall, the impact of exchange rate volatility can vary across different industrial and business
sectors, as these sectors differ substantially in terms of their trade policies and levels of market
concentration.
5.
Reference list.
[1] Feng, G. F., Yang, H. C., Gong, Q., & Chang, C. P. (2021). What is the exchange rate
volatility response to COVID-19 and government interventions? Economic Analysis and Policy,
69, 705-719. https://doi.org/10.1016/j.eap.2021.01.018
[2] Bostan, I., Toderașcu, C., & Firtescu, B. (2018). Exchange Rate Effects on International
Commercial Trade Competitiveness. Risk and Financial Management, 11(2), 19.
https://doi.org/10.3390/jrfm11020019
[3] O`zME. Birinchi jild. Toshkent, 2000-yil
[4] https://depozit.uz/exchange-rate-bank
[5] https://bank.uz
[6]https://depozit.uz/new/qanday-qilib-valyutani-eng-qulay-kursda-almashtirish-mumkin
[7]Journal of International Economics Volume 126, September 2020, 103347
[8]Journal of International Economics Volume 8, Issue 4, November 1978, 483-511 pp.
