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Dynamic Links Between Unexpected Exchange Rate Variation, Prices, and International Trade

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  • Chongcheul Cheong

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  • Tesfa Mehari
  • Leighton Williams

Abstract

This paper investigates dynamic interrelations between exchange rate uncertainty, international trade, and trading competitiveness in prices, using UK data. The empirical results derived from vector autoregressive (VAR) models show that a shock to exchange rate volatility negatively affects trade volumes, and such negative effects are greater than the effects on trade price levels. Copyright Springer Science + Business Media, LLC 2006

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File URL: http://hdl.handle.net/10.1007/s11079-006-4745-9
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Bibliographic Info

Article provided by Springer in its journal Open Economies Review.

Volume (Year): 17 (2006)
Issue (Month): 2 (April)
Pages: 221-233

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Handle: RePEc:kap:openec:v:17:y:2006:i:2:p:221-233

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Web page: http://www.springerlink.com/link.asp?id=100323

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Keywords: exchange rate volatility; import/export prices; trade volumes;

References

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  1. Paul De Grauwe, 1988. "Exchange Rate Variability and the Slowdown in Growth of International Trade," IMF Staff Papers, Palgrave Macmillan, vol. 35(1), pages 63-84, March.
  2. Giovannini, Alberto, 1988. "Exchange rates and traded goods prices," Journal of International Economics, Elsevier, vol. 24(1-2), pages 45-68, February.
  3. Holly, Sean, 1995. "Exchange Rate Uncertainty and Export Performance: Supply and Demand Effects," Scottish Journal of Political Economy, Scottish Economic Society, vol. 42(4), pages 381-91, November.
  4. Lee, Jaewoo, 1999. "The Effect of Exchange Rate Volatility on Trade in Durables," Review of International Economics, Wiley Blackwell, vol. 7(2), pages 189-201, May.
  5. Kenneth A. Froot & Paul Klemperer, 1989. "Exchange Rate Pass-Through When Market Share Matters," NBER Working Papers 2542, National Bureau of Economic Research, Inc.
  6. Bollerslev, Tim, 1987. "A Conditionally Heteroskedastic Time Series Model for Speculative Prices and Rates of Return," The Review of Economics and Statistics, MIT Press, vol. 69(3), pages 542-47, August.
  7. Kenneth D. West & Hali J. Edison & Dongchul Cho, 1993. "A utility based comparison of some models of exchange rate volatility," International Finance Discussion Papers 441, Board of Governors of the Federal Reserve System (U.S.).
  8. Richard Baldwin & Paul R. Krugman, 1986. "Persistent Trade Effects of Large Exchage Rate Shocks," NBER Working Papers 2017, National Bureau of Economic Research, Inc.
  9. Hsieh, David A, 1989. "Modeling Heteroscedasticity in Daily Foreign-Exchange Rates," Journal of Business & Economic Statistics, American Statistical Association, vol. 7(3), pages 307-17, July.
  10. Koray, Faik & Lastrapes, William D, 1989. "Real Exchange Rate Volatility and U.S. Bilateral Trade: A VAR Approach," The Review of Economics and Statistics, MIT Press, vol. 71(4), pages 708-12, November.
  11. McKenzie, Michael D, 1999. " The Impact of Exchange Rate Volatility on International Trade Flows," Journal of Economic Surveys, Wiley Blackwell, vol. 13(1), pages 71-106, February.
  12. Bailey, Martin J. & Tavlas, George S. & Ulan, Michael, 1987. "The impact of exchange-rate volatility on export growth: Some theoretical considerations and empirical results," Journal of Policy Modeling, Elsevier, vol. 9(1), pages 225-243.
  13. Chowdhury, Abdur R, 1993. "Does Exchange Rate Volatility Depress Trade Flows? Evidence from Error-Correction Models," The Review of Economics and Statistics, MIT Press, vol. 75(4), pages 700-706, November.
  14. Pagan, Adrian, 1984. "Econometric Issues in the Analysis of Regressions with Generated Regressors," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 25(1), pages 221-47, February.
  15. Kroner, Kenneth F. & Lastrapes, William D., 1993. "The impact of exchange rate volatility on international trade: Reduced form estimates using the GARCH-in-mean model," Journal of International Money and Finance, Elsevier, vol. 12(3), pages 298-318, June.
  16. Hooper, Peter & Kohlhagen, Steven W., 1978. "The effect of exchange rate uncertainty on the prices and volume of international trade," Journal of International Economics, Elsevier, vol. 8(4), pages 483-511, November.
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