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.

Export promotion agencies: Do they work?

“…Keesing and Singer (1991a) in the 1980s, the main constraint to exports is no longer the anti-trade bias of the import regime. 14 The lack of a significant effect of nominal exchange-rate volatility on exports is consistent with results reported by Tenreyro (2007). This author shows that estimates of the effect of volatility on exports are quite fragile in the context of the gravity model of trade.…”

“…The interaction between the homogeneous good classification and EPA budgets is negative in both cases, suggesting that an increase in EPA budgets has a smaller effect on exports of homogeneous than on heterogeneous goods, as expected. The rest of the variables have the expected signs, with the exception of the volatility of exchange rates (again, see Tenreyro (2007) for an explanation).…”

On trade creation and regional trade agreements: does depth matter?

“…Results are presented in columns (3) and (4) of Table 4. The coefficient on exchange rate volatility is negative but not significant in both specifications, which is in line with the ambiguous effect put forward in the literature (Tenreyro 2007). Turning to our variables of interest, results remain consistent with the benchmark estimates.…”

“…To control for this potential omitted variable bias, I include a variable of exchange rate variability between countries i and j in year t, denoted vol ijt in (1). Following Tenreyro (2007), the exchange rate variability is measured as the standard deviation of the first difference of (the logarithm of) the monthly exchange rate between the two countries:…”

Some Further Evidence on Exchange-Rate Volatility and Exports

“…In general, Rose's results are consistent with those of Dell'Ariccia. Tenreyro (2004), however, cast some doubt on the robustness of Rose's results. Using annual data from 1970-1997 on a sample of 104 (developed and developing) countries, and employing a gravity model that took endogeneity into account, she found that volatility had an insignificant effect on trade.…”