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Monetary uncertainty and trade in Eastern Europe and Central Asia: A firm-level analysis

Inmaculada Martínez-Zarzoso and Florian Johannsen

International Business Review, 2017, vol. 26, issue 3, 476-490

Abstract: This paper uses firm-level data to investigate the effects of monetary uncertainty and political instability on the extensive and intensive margins of trade (exports and imports) in Eastern Europe and Central Asia. The former is related to exchange rate volatility, currency regimes and internal hedging, whereas the latter is related to the political regime in question. We consider 26 countries, most of them small, with poorly-developed financial markets, and in which exchange rate fluctuations and political instability are relatively high. The main results are threefold. First, we find a robust negative effect of exchange rate volatility on firms' probability of exporting (extensive margin) and on their export intensity (intensive margin). Second, we find a significant positive impact of binding currency agreements in the form of euro or ERM II membership, mainly on the extensive margin of trade. Moreover, we show that being party to those agreements allows firms to engage in international trade with a lower degree of internal hedging. Third, we make the case that political stability is related to an increase in exports.

Keywords: Exchange rates; Euro; Hedging; Volatility; Uncertainty; Eastern Europe (search for similar items in EconPapers)
JEL-codes: F15 F36 (search for similar items in EconPapers)
Date: 2017
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