Nonlinear effects of exchange rate volatility on the volume of bilateral exports

In this paper, we investigate empirically the impact of exchange rate volatility on real international trade flows utilizing a 13-country data set of monthly bilateral real exports for 1980-1998. We compute one-month-ahead exchange rate volatility from the intra-monthly variations in the exchange rate to better quantify this latent variable. We find that the effect of exchange rate volatility on trade flows is nonlinear, depending on its interaction with the importing country's volatility of economic activity, and that it varies considerably over the set of country pairs considered. Copyright © 2003 John Wiley & Sons, Ltd.