The Volatility of International Trade Flows and Exchange Rate Uncertainty

Christopher Baum () and Mustafa Caglayan ()

No 695, Boston College Working Papers in Economics from Boston College Department of Economics

Abstract: Empirical evidence obtained from data covering Eurozone countries, other industrialized countries, and newly industrialized countries (NICs) over 1980–2006 shows that exchange rate uncertainty has a consistent positive and significant effect on the volatility of bilateral trade flows. A one standard deviation increase in exchange rate uncertainty leads to an eight per cent increase in trade volatility. These effects differ markedly for trade flows between industrialized countries and NICs, and are not mitigated by the presence of the Eurozone. Contrary to earlier findings, our results also suggest that exchange rate uncertainty does not affect the volume of trade flows of either industrialized countries or NICs.

Keywords: exchange rates; uncertainty; volatility; trade flows; industrialized countries; Eurozone; newly industrialized countries (search for similar items in EconPapers)
JEL-codes: F17 F31 C22 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-int and nep-opm
Date: 2008-11-27
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Persistent link: http://EconPapers.repec.org/RePEc:boc:bocoec:695

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