Problem

Exchange rate volatility

Other Names:
Instability of exchange rates
Floating exchange rates
Fluctuations in value of foreign currencies
Local currency depreciation
Foreign exchange instability
Exchange rate turbulence
Unstable currency
Nature:
When exchange rate movements are comparatively more active they create or fuel uncertainty in the global and national economies and lead to conservatism in terms of investment. Interest rates may be affected in an upwards direction, and developing countries earnings from exports lowered while import prices are raised by these exchange fluctuations. Increased exchange-rate instability has reduced the effectiveness of tariffs as a protective device and made more direct controls more attractive.
Incidence:
Instability of foreign exchange has been very common in a number of African countries in recent years. In Ghana, for example, the annual average conversion rate of the cedi to the USA dollar was c2.75 to $1.00 in 1981 and c147 to $1.00 in 1987 (a depreciation of 5,240%). In Nigeria the conversion rate of the naira in 1981 to the US dollar was N.61 to $1.00 versus N4.23 to $1.00 in 1988 (a depreciation of 593%). Uganda and Sierra Leone have been similarly affected by large currency depreciations over the same period.
Claim:
Exchange rate volatility may do invisible damage to world trade where global aggregate volumes are not affected, but where specific commodities and trading countries are negatively impacted and covered by offsetting volumes elsewhere.
Problem Type:
D: Detailed problems
Date of last update
28.04.2000 – 00:00 CEST