The Volatility of International Trade Flows and Exchange Rate Uncertainty
Empirical evidence obtained from data covering Eurozone countries, other industrialized countries, and newly industrialized countries (NICs) over 1980–2006 shows that exchange rate uncertainty has a consistent positive and significant effect on the volatility of bilateral trade ﬂows. A one standard deviation increase in exchange rate uncertainty leads to an eight per cent increase in trade volatility. These effects differ markedly for trade ﬂows between industrialized countries and NICs, and are not mitigated by the presence of the Eurozone. Contrary to earlier ﬁndings, our results also suggest that exchange rate uncertainty does not affect the volume of trade ﬂows of either industrialized countries or NICs.
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