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Exchange‐rate volatility and US–Hong Kong industry trade: is there evidence of a ‘third country’ effect?

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Abstract:

In an effort to better understand the determinants of trade flows worldwide, researchers have recently incorporated external volatility (in addition to that of the partners’ bilateral exchange rate) into their models. The so‐called ‘third country’ effect is present if adding this term changes the bilateral volatility estimates that are found when external volatility is omitted. This study examines US exports to Hong Kong for 143 industries, and imports from Hong Kong for 110 industries, and finds two key results. First, expected inflation due to Hong Kong's dollar peg leads to increased US exports in a large number of industries. Second, comparing our results with those of a previous study shows strong evidence of a ‘third country’ effect, especially for US imports. Nonparametric tests suggest that these effects differ by sector: for both exports and imports. Manufacturing industries that enjoy a large trade share are less likely to experience this effect once external volatility is incorporated into the analysis.

Keywords: China; F31; F41; Hong Kong; exchange rate volatility; industry data; the United States

Document Type: Research Article

DOI: http://dx.doi.org/10.1080/00036846.2012.654918

Affiliations: 1: The Center for Research on International Economics and The Department of Economics, The University of Wisconsin-Milwaukee, Milwaukee, WI 53201, USA 2: Department of Economics and Finance, Wehle School of Business, Canisius College, Buffalo, NY 14208, USA 3: Department of Economics, St. Mary's College of Maryland, St. Mary's City, MD 20686, USA

Publication date: June 1, 2013

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