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Exchange Rate Effects on the Volume and Variability of Trade Flows

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Listed:
  • John Barkoulas

    (University of Tennessee)

  • Christopher F. Baum

    () (Boston College
    DIW Berlin)

  • Mustafa Caglayan

    (University of Sheffield)

Abstract

This paper investigates the effects of exchange rate uncertainty on the volume and variability of trade flows. Employing a signal extraction framework, we show that the direction and magnitude of importers' and exporters' optimal trading activities depend upon the source of the uncertainty (general economic shocks, fundamental factors driving the exchange rate process, or noise in the signal of policy innovations), providing a rationale for the contradictory empirical evidence in the literature. We also show that exchange rate uncertainty emanating from general economic shocks and the fundamental factors reduces the variability of trade flows, while that related to noise in the signal of policy innovations increases variability.

Suggested Citation

  • John Barkoulas & Christopher F. Baum & Mustafa Caglayan, 1998. "Exchange Rate Effects on the Volume and Variability of Trade Flows," Boston College Working Papers in Economics 405., Boston College Department of Economics, revised 12 Sep 2001.
  • Handle: RePEc:boc:bocoec:405
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    trade flows; signal extraction; exchange rate volatility;

    JEL classification:

    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • F17 - International Economics - - Trade - - - Trade Forecasting and Simulation

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