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Exchange Rate Fluctuations and Trade Flows: Evidence From the European Union

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  • Mr. Giovanni Dell'Ariccia

Abstract

This paper analyzes the effects of exchange rate volatility on bilateral trade flows. Through use of a gravity model and panel data from western Europe, exchange rate uncertainty is found to have a negative effect on international trade. The results seem to be robust with respect to the particular measures representing exchange rate uncertainty. Particular attention is reserved for problems of simultaneous causality. The negative correlation between trade and bilateral volatility remains significant after controlling for the simultaneity bias. However, a Hausman test rejects the hypothesis of the absence of simultaneous causality.

Suggested Citation

  • Mr. Giovanni Dell'Ariccia, 1998. "Exchange Rate Fluctuations and Trade Flows: Evidence From the European Union," IMF Working Papers 1998/107, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:1998/107
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    Keywords

    WP; ERM E; exchange rate volatility; Exchange Rate; Volatility; Bilateral Trade; EMU; volatility coefficient; exchange rate uncertainty; standard deviation; EU trade; volatility measure; negative correlation; Exchange rates; Real exchange rates; Currencies; Plurilateral trade; Trade balance; Western Europe;
    All these keywords.

    JEL classification:

    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F17 - International Economics - - Trade - - - Trade Forecasting and Simulation
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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