Implications of exchange rate volatility for trade: Volatility measurement matters

Allison Roehling

Review of International Economics, 2021, vol. 29, issue 5, 1486-1523

Abstract: The relationship between exchange rate volatility and trade is inconclusive in the current literature. I find evidence this is due to variation in definitions of exchange rate volatility. My results suggest common volatility measures weigh variation differently over time and economic conditions. Using an autoregressive distributed lag model, I demonstrate the importance of volatility measurement to the estimated relationship of volatility and exports. I find substantial variation across volatility measures, trading partners, and pre‐/post‐2008. When significant, the relationship is almost always negative, albeit unsubstantial. In order to overcome the literature's mixed results, the definition of volatility needs to be standardized.

Date: 2021
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