The primary and vital barometer for assessing the international competitiveness of an economy and by implication its trade position is the exchange rate (Wang, 2015). Thus, the nexus between exchange rate volatility and exports has attracted far-reaching debate among governments, investors, analysts, researchers, economists, policymakers, since the Bretton Woods system of fixed exchange rate collapsed in March, 1973. The relevance of the knowledge of the nexus between exchange rate volatility and exports to the exchange rate and policies of trade of both developing and developed economies of the world had resulted in the proliferation of theoretical and empirical literature in this area yielding conflicting results.

Two famous hypotheses have surfaced from this literature. The first is that exchange rate volatility would have an adverse effect on trade flows. However, the second is that exchange rate volatility would boost trade flows. The hypothesis that volatility of exchange rate would reduce flows of trade finds an advocate in Cushman (1983); Cushman (1986); Cushman (1988); Akhtar and Hilton (1984); Kenen and Rodrik (1986); Thursby and Thursby