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The effect of exchange rate volatility on trade: correcting for selection bias and asymmetric trade flows

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  • Atef Al-Rashidi
  • Bidisha Lahiri

Abstract

The gravity model that serves as an important framework to explore the relation between exchange rate volatility and international trade suffers from two weaknesses: selection bias caused by dropping of observations with zero trade flows and the inability to predict asymmetric bilateral trade flows. The latter includes situations of bilateral trade in one direction but not in the opposite direction. While some recent literature has addressed the selection bias, there are no studies that address both problems in the context of the effect of exchange rate volatility on international trade. The article contributes to the literature by applying a recent model of firm selection to control for both biases. We found that the effect of exchange rate volatility on trade, that appears to be weak under the standard gravity model or in those models that only correct for sample selection bias, emerges as a strong negative effect as both biases get controlled.

Suggested Citation

  • Atef Al-Rashidi & Bidisha Lahiri, 2013. "The effect of exchange rate volatility on trade: correcting for selection bias and asymmetric trade flows," Applied Economics Letters, Taylor & Francis Journals, vol. 20(11), pages 1121-1126, July.
    • Handle: RePEc:taf:apeclt:v:20:y:2013:i:11:p:1121-1126
    DOI: 10.1080/13504851.2013.791015
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    Cited by:

    1. Shikha Gupta & Nand Kumar, 2021. "Three decades of narrow globalization: Evaluating India's exports between 1991 and 2017," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 42(2), pages 343-359, March.
    2. Özge Barış-Tüzemen & Samet Tüzemen, 2021. "Revisiting The Role Of Exchange Rate Volatility In Turkey’S Exports: Evidence From The Structural Var Approach," Economic Annals, Faculty of Economics and Business, University of Belgrade, vol. 66(231), pages 127-150, October –.

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