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Exchange Rate Effects on the Volume and Variability of Trade Flows

  • John Barkoulas

    (University of Tennessee)

  • Christopher F. Baum

    ()

    (Boston College
    DIW Berlin)

  • Mustafa Caglayan

    (University of Sheffield)

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.

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Paper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 405..

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Date of creation: 30 Mar 1998
Date of revision: 12 Sep 2001
Publication status: Published 2002, Journal of International Money and Finance, 21, 481-496.
Handle: RePEc:boc:bocoec:405
Contact details of provider: Postal: Boston College, 140 Commonwealth Avenue, Chestnut Hill MA 02467 USA
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Web page: http://fmwww.bc.edu/EC/
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  25. Sercu, Piet & Vanhulle, Cynthia, 1992. "Exchange rate volatility, international trade, and the value of exporting firms," Journal of Banking & Finance, Elsevier, vol. 16(1), pages 155-182, February.
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