The Gravity Modelling of the Relationship between Exchange Rate Volatility and Foreign Trade in Visegrad Countries

The paper focuses on the relationship between exchange rate volatility and foreign trade. The aim of this study is to evaluate the effect of exchange rate volatility on the foreign trade of Visegrad Countries on bilateral level as well as on the commodity level for different traded product groups determined by SITC classification. An empirical analysis uses territorial and commodity structuring of foreign trade data and is realized for the period 1999:Q1 – 2014:Q3. We use panel regression applied to the gravity model of foreign trade for analyzing the exchange rate volatility effects. Exchange rate volatility leads to decreasing of foreign trade turnover on the bilateral level. In the case of Slovakia, a negative effect on foreign trade was identified in all groups except chemicals, raw materials and raw materials for food purposes. For Poland was these effects detected for trade with mineral fuels, lubricants, animal fats, oils and waxes, while other products show their negative effects of exchange rate volatility on international trade. For Hungary, all statistically significant coefficients are negative and thus confirm the assumption of reduction of foreign trade turnover with increased exchange rate volatility. For the Czech Republic, the negative effect of exchange rate volatility was reflected in trade flows of food and live animals, animal and vegetable fats, machinery, transport equipment and miscellaneous manufactured articles.