The Significance of the Exchange Rates: A Survey of the Literature

Abstract

Since the collapse of the Bretton Woods in the late 1970’s, the international monetary system has been dominated by the floating exchange rate system. The currencies around the world are mainly determined by the laws of the supply and demand. International trade has been the engine of growth and the cause of stability in many countries. International trade flows have increased extremely over the last three decades. The reduction of trade and policy barriers have contributed in the rise of global trade, but the interesting question is if the exchange rates play any role in international economic relations. An important aspect of the relationship between the exchange rates and the international economic relations is the intensity of the effect. To examine the intensity of this relation, we must mention the connection among exchange rates with the economy and trade. Due to the fact every country—developed or developing—targets economic growth, the investigation of the relationship of the exchange rate with the economy is important. Moreover, the exchange rate affects the trade volume and the current account, so the exploration of the exchange rate with the trade performance is necessary. The aim of this paper is to survey the economic literature on the relationship between exchange rates and global economic relations.