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The effects of exchange rate volatility on international trade flows: evidence from panel data analysis and fuzzy approach

  • Elif Nuroglu

    ()

    (International University of Sarajevo, Faculty of Business and Administration, Sarajevo, Bosnia and Herzegovina)

  • Robert M. Kunst

    (University of Vienna, Department of Economics, Vienna, Austria)

The aim of this paper is to analyze the effects of exchange rate volatility on international trade flows by using two different approaches, the panel data analysis and fuzzy logic, and to compare the results. To a panel with the cross- section dimension of 91 pairs of EU15 countries and with time ranging from 1964 to 2003, an extended gravity model of trade is applied in order to determine the effects of exchange rate volatility on bilateral trade flows of EU15 countries. The estimated impact is clearly negative, which indicates that exchange rate volatility has a negative influence on bilateral trade flows. Then, this traditional panel approach is contrasted with an alternative investigation based on fuzzy logic. The key elements of the fuzzy approach are to set fuzzy decision rules and to assign membership functions to the fuzzy sets intuitively based on experience. Both approaches yield very similar results and fuzzy approach is recommended to be used as a complement to statistical methods.

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Article provided by University of Rijeka, Faculty of Economics in its journal Zbornik radova Ekonomskog fakulteta u Rijeci/Proceedings of Rijeka Faculty of Economics.

Volume (Year): 30 (2012)
Issue (Month): 1 ()
Pages: 9-31

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Handle: RePEc:rfe:zbefri:v:30:y:2012:i:1:p:9-31
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  1. Ethier, Wilfred, 1973. "International Trade and the Forward Exchange Market," American Economic Review, American Economic Association, vol. 63(3), pages 494-503, June.
  2. Philip R. Lane & Gian Maria Milesi-Ferretti, 2001. "External Wealth, the Trade Balance, and the Real Exchange Rate," CEG Working Papers 200113, Trinity College Dublin, Department of Economics.
  3. Rocco Huang, 2005. "Distance and Trade: Disentangling unfamiliarity effects and transport cost effects," International Trade 0511010, EconWPA.
  4. 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.
  5. Padma Gotur, 1985. "Effects of Exchange Rate Volatility on Trade: Some Further Evidence (Effets de l'instabilité des taux de change sur le commerce mondial: nouvelles constatations) (Efectos de la inestabilidad de los t," IMF Staff Papers, Palgrave Macmillan, vol. 32(3), pages 475-512, September.
  6. Kenen, Peter B & Rodrik, Dani, 1986. "Measuring and Analyzing the Effects of Short-term Volatility in Real Exchange Rates," The Review of Economics and Statistics, MIT Press, vol. 68(2), pages 311-15, May.
  7. Eric van Wincoop & Philippe Bacchetta, 2000. "Does Exchange-Rate Stability Increase Trade and Welfare?," American Economic Review, American Economic Association, vol. 90(5), pages 1093-1109, December.
  8. 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.
  9. repec:imf:imfwpa:02/51 is not listed on IDEAS
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