Exchange Rate Fluctuations and Trade Flows: Evidence From the European Union
IMF Working Papers, August 1, 1998
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Bibliographic details
- Authors: Giovanni Dell'Ariccia
- Published: August 1, 1998
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451852950.001
Summary
- This paper analyzes the effects of exchange rate volatility on bilateral trade flows using a gravity model and panel data from western Europe.
- Exchange rate uncertainty is found to have a negative effect on international trade.
- Results are reported as robust across 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.
- A Hausman test rejects the hypothesis of the absence of simultaneous causality.
Methodology
- Empirical approach: gravity model applied to panel data from western Europe.
- Key econometric concern: simultaneous causality between trade flows and exchange rate volatility.
- Diagnostic: Hausman test used to assess presence/absence of simultaneous causality (result: rejection of absence).
Main findings
- Exchange rate uncertainty exerts a negative effect on bilateral international trade.
- The negative correlation between trade and bilateral volatility remains significant after controlling for simultaneity bias.
- Robustness: findings hold across different measures of exchange rate uncertainty used in the analysis.
Implications and interpretation
- Exchange rate volatility can be detrimental to international trade among western European countries.
- Simultaneity between trade and volatility is empirically important and must be accounted for in estimation; statistical tests indicate simultaneity is present.
Subjects and keywords
- Subjects: 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
Content in this bundle
- Exchange Rate Fluctuations and Trade Flows: Evidence from the European Union - WP/98/107