On the trade impact of nominal exchange rate volatility

Abstract

What is the effect of nominal exchange rate variability on trade? I argue that the methods conventionally used to answer this perennial question are plagued by a variety of sources of systematic bias. I propose a novel approach that simultaneously addresses all of these biases, and present new estimates from a broad sample of countries from 1970 to 1997. The answer to the question is "Zero:" Nominal exchange rate variabibily has no impact on trade flows.

Determinants of the international mobility of students

“…Given the presence of zeroes, one need nevertheless to combine Poisson and instrumental variable estimation. This has been suggested by Tenreyro (2007) in the context of the GMM framework. The idea is to start from the underlying orthogonality condition associated to the Poisson estimator.…”

Fixed exchange rates and trade

“…Alesina, Barro, and Tenreryo (2002) use, as an instrument, a dummy that indicates whether two countries share a common base country or the probability of that two countries share a common base, and find a strong effect of currency unions on trade. Tenreyro (2003) uses the same triangular approach to generating instruments in her work on exchange rate volatility and finds negligent impacts of volatility. 54 Frankel and Wei (1993) and find a negative and significant effect of exchange rate volatility on trade when they instrument for this regressor using the standard deviation of relative money supplies, but the size of this effect is smaller when using IV than when using OLS.…”

“…56 An appropriate instrument for our study will predict whether a country pegs its currency, but this variable itself will have no direct impact on trade, outside of its indirect effect through the channel of exchange rate regime choice. Our construction of an instrument draws on the insights of Estevadeordal et al (2003) and Tenreyro (2003), and uses information about whether neighboring countries peg and, if so, to whom. We calculate, for a given pair of countries, country i and country j, the percentage of countries in country j's region that are 54 Such triangular approaches require eliminating observations with the base country.…”

The Euro and Structural Reforms

“…6 , , Persson (2001), Thom and Welsh (2002), and Tenreyro (2007) address theoretically and empirically a host of issues relating the effect of monetary unions on trade. 7 See, for instance, McCallum (1995).…”