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Why is it so Difficult to Find an Effect of Exchange Rate Risk on Trade?

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Author Info
Franc Klaassen (University of Amsterdam)

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Abstract

It is commonly argued that exchange rate risk depresses international trade. However, the large literature on this subject has not yet provided conclusive evidence. This paper analyzes why it is so difficult to obtain a clear answer from time series analyses. We use data on bilateral aggregate U.S. exports to the other G7 countries. The results show that export decisions are mostly affected by the exchange rate about one year later. The riskiness of the exchange rate at such a long horizon appears fairly constant over time with only short-term fluctuations. This makes it difficult to discover the true effect of exchange risk on trade from the limited time series data that are typically available.

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Paper provided by Econometric Society in its series Econometric Society World Congress 2000 Contributed Papers with number 0133.

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Date of creation: 01 Aug 2000
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Handle: RePEc:ecm:wc2000:0133

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Torben Andersen & Tim Bollerslev & Francis X. Diebold & Paul Labys, 1999. "The Distribution of Exchange Rate Volatility," NBER Working Papers 6961, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  2. Klein, Michael W., 1990. "Sectoral effects of exchange rate volatility on United States exports," Journal of International Money and Finance, Elsevier, vol. 9(3), pages 299-308, September. [Downloadable!] (restricted)
  3. Merton, Robert C., 1980. "On estimating the expected return on the market : An exploratory investigation," Journal of Financial Economics, Elsevier, vol. 8(4), pages 323-361, December. [Downloadable!] (restricted)
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  4. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, vol. 14(1-2), pages 3-24, February. [Downloadable!] (restricted)
  5. Bayoumi, Tamim & Eichengreen, Barry, 1998. "Exchange rate volatility and intervention: implications of the theory of optimum currency areas," Journal of International Economics, Elsevier, vol. 45(2), pages 191-209, August. [Downloadable!] (restricted)
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  6. Klaassen, F., 1999. "Purchasing power parity : evidence from a new test," Discussion Paper 9, Tilburg University, Center for Economic Research. [Downloadable!]
  7. Caporale, Tony & Doroodian, Khosrow, 1994. "Exchange rate variability and the flow of international trade," Economics Letters, Elsevier, vol. 46(1), pages 49-54, September. [Downloadable!] (restricted)
  8. Abuaf, Niso & Jorion, Philippe, 1990. " Purchasing Power Parity in the Long Run," Journal of Finance, American Finance Association, vol. 45(1), pages 157-74, March. [Downloadable!] (restricted)
  9. Philippe Bacchetta & Eric van Wincoop, 1998. "Does exchange rate stability increase trade and capital flows?," Research Paper 9818, Federal Reserve Bank of New York. [Downloadable!]
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  10. Gagnon, Joseph E., 1993. "Exchange rate variability and the level of international trade," Journal of International Economics, Elsevier, vol. 34(3-4), pages 269-287, May. [Downloadable!] (restricted)
  11. Viaene, Jean-Marie & de Vries, Casper G., 1992. "International trade and exchange rate volatility," European Economic Review, Elsevier, vol. 36(6), pages 1311-1321, August. [Downloadable!] (restricted)
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  12. Qian, Ying & Varangis, Panos, 1994. "Does Exchange Rate Volatility Hinder Export Growth?," Empirical Economics, Springer, vol. 19(3), pages 371-96.
  13. Diebold, Francis X. & Nason, James A., 1990. "Nonparametric exchange rate prediction?," Journal of International Economics, Elsevier, vol. 28(3-4), pages 315-332, May. [Downloadable!] (restricted)
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  14. O. Cushman, David, 1986. "Has exchange risk depressed international trade? The impact of third-country exchange risk," Journal of International Money and Finance, Elsevier, vol. 5(3), pages 361-379, September. [Downloadable!] (restricted)
  15. Andersen, Torben G & Bollerslev, Tim, 1998. "Answering the Skeptics: Yes, Standard Volatility Models Do Provide Accurate Forecasts," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 885-905, November.
  16. Mark, Nelson C. & Choi, Doo-Yull, 1997. "Real exchange-rate prediction over long horizons," Journal of International Economics, Elsevier, vol. 43(1-2), pages 29-60, August. [Downloadable!] (restricted)
  17. Cushman, David O., 1983. "The effects of real exchange rate risk on international trade," Journal of International Economics, Elsevier, vol. 15(1-2), pages 45-63, August. [Downloadable!] (restricted)
  18. 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. [Downloadable!] (restricted)
  19. Wei, Shang-Jin, 1999. "Currency hedging and goods trade," European Economic Review, Elsevier, vol. 43(7), pages 1371-1394, June. [Downloadable!] (restricted)
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  20. Fountas, S. & Aristotelous, K., 1998. "Has the European Monetary System Led to More Exports? Evidence from Four European Union Countries," Department of Economics 31, National University of Ireland, Galway - Department of Economics.
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. WenShwo Fang & YiHao Lai & Stephen M. Miller, 2005. "Does Exchange Rate Risk Affect Exports Asymmetrically? Asian Evidence," Working papers 2005-09, University of Connecticut, Department of Economics. [Downloadable!]
  2. Christopher F. Baum & Mustafa Caglayan & Neslihan Ozkan, 2000. "Nonlinear Effects of Exchange Rate Volatility on the Volume of Bilateral Exports," Boston College Working Papers in Economics 488, Boston College Department of Economics, revised 30 Jul 2002. [Downloadable!]
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  3. Christopher F Baum, Mustafa Caglayan, Neslihan Ozkan, 2001. "Exchange Rate Effects on the Volume of Trade Flows: An Empirical Analysis Employing High-Frequency Data," Computing in Economics and Finance 2001 85, Society for Computational Economics. [Downloadable!]
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  4. Nicolas Péridy, 2003. "Exchange rate volatility, sectoral trade, and the aggregation bias," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 127(3), pages 389-418, September. [Downloadable!] (restricted)
  5. WenShwo Fang & YiHao Lai & Stephen M. Miller, 2005. "Export Promotion through Exchange Rate Policy: Exchange Rate Depreciation or Stabilization?," Working papers 2005-07, University of Connecticut, Department of Economics. [Downloadable!]
  6. Helmut Herwartz & Henning Weber, 2007. "Exchange Rate Uncertainty and Trade Growth - A Comparison of Linear and Nonlinear (Forecasting) Models," SFB 649 Discussion Papers SFB649DP2007-042, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany. [Downloadable!]
  7. Cotter, John & Bredin, Don, 2005. "Volatility and Irish Exports," MPRA Paper 3522, University Library of Munich, Germany. [Downloadable!]
  8. Jelle Brouwer & Richard Paap & Jean-Marie Viaene, 2007. "The Trade and FDI Effects of EMU Enlargement," Tinbergen Institute Discussion Papers 07-077/2, Tinbergen Institute. [Downloadable!]
  9. Maurice J.G. Bun & Franc J.G.M. Klaassen, 2002. "Has the Euro increased Trade?," Tinbergen Institute Discussion Papers 02-108/2, Tinbergen Institute. [Downloadable!]
  10. Jelle Brouwer & Richard Paap & Jean-Marie Viaene, 2007. "The Trade and FDI Effects of EMU Enlargement," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
  11. Cotter, John, 2006. "Real & Nominal Foreign Exchange Volatility Effects on Exports – The Importance of Timing," MPRA Paper 3494, University Library of Munich, Germany. [Downloadable!]
  12. WenShwo Fang & Stephen M. Miller, 2004. "Exchange rate depreciation and exports: The case of Singapore revisited," Working papers 2004-45, University of Connecticut, Department of Economics. [Downloadable!]
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