Exchange Rate Fluctuations and Trade Flows: Evidence From the European Union

August 1, 1998

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper analyzes the effects of exchange rate volatility on bilateral trade flows. Through use of a gravity model and panel data from western Europe, exchange rate uncertainty is found to have a negative effect on international trade. The results seem to be robust with respect to the particular measures representing exchange rate uncertainty. Particular attention is reserved for problems of simultaneous causality. The negative correlation between trade and bilateral volatility remains significant after controlling for the simultaneity bias. However, a Hausman test rejects the hypothesis of the absence of simultaneous causality.

Subject: Currencies, Exchange rates, Foreign exchange, International trade, Money, Plurilateral trade, Real exchange rates, Trade balance

Keywords: Bilateral Trade, Currencies, EMU, ERM E, EU trade, Exchange Rate, exchange rate uncertainty, exchange rate volatility, Exchange rates, negative correlation, Plurilateral trade, Real exchange rates, standard deviation, Trade balance, Volatility, volatility coefficient, volatility measure, Western Europe, WP

Pages:
27
Volume:
1998
DOI:
https://doi.org/10.5089/9781451852950.001
Issue:
107
Series:
Working Paper No. 1998/107
Stock No:
WPIEA1071998
ISBN:
9781451852950
ISSN:
1018-5941

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