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Impact of Exchange Rate Uncertainty on Trade Flows: Evidence from Commodity Trade between the United States and the United Kingdom
Author(s) -
BahmaniOskooee Mohsen,
Kovyryalova Marina
Publication year - 2008
Publication title -
world economy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.594
H-Index - 68
eISSN - 1467-9701
pISSN - 0378-5920
DOI - 10.1111/j.1467-9701.2008.01116.x
Subject(s) - economics , cointegration , exchange rate , liberian dollar , unit root , volatility (finance) , commodity , balance of trade , econometrics , us dollar , volatility swap , international economics , monetary economics , implied volatility , finance , market economy
Previous studies that investigated the impact of exchange rate volatility on the trade flows employed aggregate trade data and standard estimation techniques. They provided mixed results. In this paper we use disaggregated import and export data for 177 commodities traded between the United States and the United Kingdom to investigate whether volatility of the real bilateral dollar–pound exchange rate has any detrimental effect on trade flows at the commodity level. Additionally, we employ the bounds testing approach to cointegration and error‐correction modelling that is suitable for the models used mostly because it does not require pre‐unit‐root testing and variables in the model could be stationary, non‐stationary or a combination of the two. In most trade flow models estimated, we found a negative effect of exchange rate volatility on commodity trade.