Does trade freedom affect exchange rate movement? A perspective of high-technology trade

Abstract

Changes in the degree of trade freedom influence economic development and foreign investment, which in turn, affect currency values and exchange rate movements. Therefore, this study examined the direct and indirect impacts of trade freedom on exchange rate movement in emerging, developing, and developed economies. Empirical tests conducted using panel data from 75 countries revealed that trade freedom has a nonlinear U-shaped relationship with exchange rate movement, which is positively moderated by high-technology trade and foreign direct investment. Additionally, the results of heterogeneity analysis showed that trade freedom has a linear positive impact on the exchange rate movement of developed economies but a U-shaped impact on emerging and developing economies, with a stronger impact on emerging economies. The findings of this study provide valuable insights for governments to strike a balance between promoting trade freedom and maintaining currency exchange rate stability.

KEYWORDS:

• Trade freedom
• exchange rates
• trade development
• system GMM

JEL Classifications:

• F4
• F19
• F10

Disclosure statement

No potential conflict of interest was reported by the author(s).

Statement of interests

All authors apply unanimously. We are only interested in contributing to this journal and will not contribute to other journals or international conferences. We promise to only contribute our research results to your journal.

Availability of data

Authors provide data on request.

Notes

1 The anti-log of 4.4 is 81.45

2 The anti-log of 4.56 is 95.58

Additional information

Funding

This work was supported by Universiti Putra Malaysia: [Grant Number GPSPE/2022/6303819].