Do Multilateral Trade Linkages Explain Bilateral Real Exchange Rate Volatility?
AbstractThis paper investigates the impact of multilateral trade linkages on bilateral real exchange rate volatility by examining a particular channel —the extent of the effects of differences on import intensities (GDP’s share of imports of a given product and origin) between trade partners— of long-run real exchange rate volatility. I exploit a large panel of cross-country data over the years 1970–97 and construct a micro-founded index to capture this effect. In the estimations I address carefully endogeneity issues by testing not just exogeneity but also the presence of weak instruments. As robustness check and under the latter I estimate LIML and Fuller(1) regressions to ensure unbiased coefficients. Results strongly support the hypothesis that a pair of countries with a larger difference in the import intensities from the rest of the world faces a larger bilateral real exchange rate volatility. This result turns to be robust to the inclusion of bilateral trade a commonly argued moderator of volatility and other controls. These empirical findings are consistent with recent international trade models that highlight multi-country trade linkages.
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Bibliographic InfoPaper provided by University of Chile, Department of Economics in its series Working Papers with number wp377.
Length: 34 pages
Date of creation: Feb 2013
Date of revision:
Other versions of this item:
- Claudio Bravo-Ortega, 2009. "Do Multilateral Trade Linkages Explain Bilateral Real Exchange Rate Volatility?," Working Papers wp304, University of Chile, Department of Economics.
- F30 - International Economics - - International Finance - - - General
- F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General
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