Question

Running a firm that wanting to increase exports during a period when interest rates were rising. How would you accomplish this?

Answer 1

Inflation and interest rates affect imports and exports primarily through their influence on the exchange rate. ... Conventional currency theory holds that a currency with a higher inflation rate (and consequently a higher interest rate) willdepreciate against a currency with lower inflation and a lower interest rate

Let's use USA, for example. THEORY wise, let's break this down. Assuming imports are constant (they NEVER are) so that net-exports are strongly positive, selling many more goods and services abroad over some bounded time period (note, there must be some TIME period over which this "significant increase" occurred - we don't want to find out we compared apples to oranges) must have come about from something widespread and social. We need an assumption that caused this significant increase in exports; let's say rather long-standing increase in demand for US export products. This long-standing (sustained) increase is US export products we will also note had NOTHING to do with domestic inflation before. Since in the US, the dollar is the currency we accept for our exports, and since people are all-of-a-sudden wanting to buy our exports, there will be an increased demand (abroad) for American dollars, in order to pay for (to buy) more of our exports. It just happens that the dollar is an international currency; the outcomes here does not require this dollar assumption to remain valid. That increase in demand for dollars, like any increase in demand for any good, should increase the "price" of the dollar which is its "relative exchange value" compared to other currencies. That much probably does occur in reality - the dollar's exchange rate is bid up, because the financial markets are reasonably efficient at clearing compared to other markets, like the market for exports!

Let's use USA, for example. THEORY wise, let's break this down. Assuming imports are constant (they NEVER are) so that net-exports are strongly positive, selling many more goods and services abroad over some bounded time period (note, there must be some TIME period over which this "significant increase" occurred - we don't want to find out we compared apples to oranges) must have come about from something widespread and social. We need an assumption that caused this significant increase in exports; let's say rather long-standing increase in demand for US export products. This long-standing (sustained) increase is US export products we will also note had NOTHING to do with domestic inflation before. Since in the US, the dollar is the currency we accept for our exports, and since people are all-of-a-sudden wanting to buy our exports, there will be an increased demand (abroad) for American dollars, in order to pay for (to buy) more of our exports. It just happens that the dollar is an international currency; the outcomes here does not require this dollar assumption to remain valid. That increase in demand for dollars, like any increase in demand for any good, should increase the "price" of the dollar which is its "relative exchange value" compared to other currencies. That much probably does occur in reality - the dollar's exchange rate is bid up, because the financial markets are reasonably efficient at clearing compared to other markets, like the market for exports!

APPLICATION to the real world. If you wanted to show exchange rate affecting inflation, you would need to identify some proper proxy variables first, and then at least prove some association (correlation) between them. Theory doesn't even help to design a test of this solution because it's too diffuse. Basically much of the time theory is all a big joke to keep Macroeconomists making pronouncements they have no evidence for, keeping them in positions they don't deserve. It then becomes a contest in how elegantly you can lie to the public. I believe it would be very difficult to prove any effects of trade on either inflation or even trade values empirically, just as it is impossible to definitely prove the Laffer Curve. Levels and frequencies over time: Net trade in the USA is only about, I think, 17% of GDP just to give an indication of scale, then the number of trade transactions does not even come close to a blip in the number of transactions daily affecting the money supplies (M1, M2, reserves, etc.).
In fact, none of the consequences of the Macroeconomics of trade could ever be shown to actually happen empirically, and therefore they have never been proven even to exist, so what good is a theory that's never shown to be true? Nice Maybe for cocktail party conversation, or navel-gazing if you don't like to attend cocktail parties.

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