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Does the risk of exchange rate fluctuation really affect international trade flows between countries?

  • Chongcheul Cheong

    ()

    (Pusan National University)

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    This paper investigates the effect of exchange rate volatility on the UK's import trade. As part of econometric problems arising from a measured volatility, we consider a special case when an ARCH type auxiliary model is used to measure uncertainty in the exchange rate, and discuss a procedure for the correct inference of the OLS estimates of a primary equation in the second stage, which includes the generated variable. By applying this two-step approach, we find a statistically significant, negative impact of exchange rate uncertainty on Britain''s imports.

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    File URL: http://www.accessecon.com/pubs/EB/2004/Volume6/EB-04F10002A.pdf
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    Article provided by AccessEcon in its journal Economics Bulletin.

    Volume (Year): 6 (2004)
    Issue (Month): 4 ()
    Pages: 1-8

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    Handle: RePEc:ebl:ecbull:eb-04f10002
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    1. Hendry, David F., 1995. "Dynamic Econometrics," OUP Catalogue, Oxford University Press, number 9780198283164, March.
    2. 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.).
    3. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
    4. Bollerslev, Tim & Chou, Ray Y. & Kroner, Kenneth F., 1992. "ARCH modeling in finance : A review of the theory and empirical evidence," Journal of Econometrics, Elsevier, vol. 52(1-2), pages 5-59.
    5. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 33(1), pages 125-132.
    6. 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.
    7. Jeffrey Frankel & Andrew Rose, 2002. "An Estimate Of The Effect Of Common Currencies On Trade And Income," The Quarterly Journal of Economics, MIT Press, vol. 117(2), pages 437-466, May.
    8. 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.
    9. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
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