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Exchange-rate volatility and trade: a semiparametric approach

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We use a gravity model to analyse the impact of exchange-rate volatility on the volume of bilateral international trade. Semiparametric regression methods are applied to the pooled data for over 200 countries. Our results indicate that volatility affects trade negatively although at very high level of volatility the effect diminishes and eventually becomes statistically indistinguishable from zero. Countries apparently find avenues to mitigate the detrimental impact of exchange rate uncertainty when volatility attains very high levels. These results help reconcile the contradictory findings often found in the literature on the impact of exchange-rate uncertainty on trade volume.

Document Type: Research Article


Affiliations: Department of Economics, Western Michigan University, Kalamazoo, MI 49008, USA

Publication date: 2011-05-01

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