Transparency in the Foreign Exchange Market and the Volume of International Trade

In this paper we study the impact of more transparency in the foreign exchange market on the <i>ex ante</i> expected volume of international trade. Transparency is measured by the informational content of publicly observable signals. These signals convey information about the use of policy instruments which affect the future exchange rate. We find that a higher level of transparency may increase or decrease the volume of international trade. In particular, the impact of greater transparency depends on the curvature of the firms' marginal cost function. Furthermore, the firms'<i>ex ante</i> expected profits are higher when the foreign exchange market is more transparent. Copyright © 2006 The Authors; Journal compilation © 2006 Blackwell Publishing Ltd.