Importance of International Trade
According to this study, international commerce does not always lead to inclusive growth. The latter is highly dependent on the quality of the public-private policies that guide and supplement it. Inclusive development is a form of economic development that results in a more equitable labor force, production system, and society (George & Rengamani, 2018). This result is mainly determined by policies that encourage production convergence, institutional changes, and social protection. The purpose of this publication is to assess how international commerce affects regional prosperity and equity.
International trade can assist in minimizing structural heterogeneity in terms of productivity disparities between various strata of organizations to the degree that exporters account for a significant share of total businesses. This is because export firms in the region have greater productivity and salaries than other businesses due to a higher level of formality, better access to finance, larger-scale manufacturing, and a higher level of human capital (George & Rengamani, 2018). The more international enterprises there are, the narrower the production and social gaps become. On the other hand, the higher the productivity gap, the greater the concentration of export businesses and the fewer their links with the rest of the economy.
When Exchange Rates Change
This article examines the exchange rates of four major currencies versus the US dollar from 2005 to 2019, including the euro, the pound, the Canadian dollar, and the Japanese yen, through multifractal detrended fluctuation analysis. On the full-time scale, the four exchange rate series have numerous multifractal qualities, with the yen having the lowest multifractal properties of the four, indicating the most market efficiency (Han et al., 2019). The four exchange rate series have multifractal qualities due to long-range correlation and fat-tail characteristics of non-Gaussian probability density functions. The internal links between distinct exchange markets are reflected in cross-correlations among different exchange markets.
The purpose of this study is to analyze the multifractality degrees of the euro, pound, Canadian dollar, and yen exchange markets in three sub-samples separated by the 2008 financial crisis and the Federal Reserve’s announcement of its departure from quantitative easing (QE) policy in 2014. The researchers discovered that all four exchange markets had multifractal structural features in the sample and sub-samples, resulting in inefficiency at various levels in these foreign currency markets (Han et al., 2019). This research is essential theoretically and practically in implementing the Effective Market Hypothesis (EMH) in the exchange market. The findings of this study may have substantial implications for future research into the dynamic mechanism and efficiency of the exchange market and aid investors in successfully managing market risks.
Disadvantage of Flexible Rates
A dynamic panel model with country and regime-specific smooth variations in the mean is used to investigate the effects of exchange rate regimes on inflation persistence. The research provides strong evidence that floating rates have more substantial inflation persistence than fixed rates. The effects of the exchange rate regime on relative inflation persistence, on the other hand, are unclear (Wu & Wu, 2018). If smooth mean movements are not controlled, the neutrality of exchange rate regimes to inflation persistence is likely to be seen. Inflation persistence is overestimated when disruptions and smooth variations in mean are not controlled for contemporaneously.
It is important to note that the flexible exchange rate causes inflation. Import items become more expensive as the exchange rate declines, resulting from the BOP imbalance. The high cost of imported products then fuels inflationary tendencies. When a currency depreciates, the local economy suffers both demand-pull and cost-push inflationary pressures, making imports more expensive (Wu & Wu, 2018). Governments value a managed exchange rate because of these disadvantages of a freely fluctuating exchange rate. Their central banks purchase and sell currencies in the foreign exchange market to reduce the degree of fluctuation as much as possible.
References
George, C. C., & Rengamani, J. (2018). International trade importance trends and approaches. Indian Journal of Public Health Research & Development, 9(3), 886–895. Web.
Han, C., Wang, Y., & Ning, Y. (2019). Comparative analysis of the multifractality and efficiency of exchange markets: Evidence from exchange rates dynamics of major world currencies. Physica A: Statistical Mechanics and Its Applications, 535, 122365. Web.
Wu, J. W., & Wu, J. L. (2018). Does a flexible exchange rate regime increase inflation persistence? Journal of International Money and Finance, 86, 244–263. Web.