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Why is it so Difficult to Find an Effect of Exchange Rate Risk on Trade?

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  • Franc Klaassen

    (University of Amsterdam)

Abstract

It is commonly argued that exchange rate risk depresses international trade. However, the large literature on this subject has not yet provided conclusive evidence. This paper analyzes why it is so difficult to obtain a clear answer from time series analyses. We use data on bilateral aggregate U.S. exports to the other G7 countries. The results show that export decisions are mostly affected by the exchange rate about one year later. The riskiness of the exchange rate at such a long horizon appears fairly constant over time with only short-term fluctuations. This makes it difficult to discover the true effect of exchange risk on trade from the limited time series data that are typically available.

Suggested Citation

  • Franc Klaassen, 2000. "Why is it so Difficult to Find an Effect of Exchange Rate Risk on Trade?," Econometric Society World Congress 2000 Contributed Papers 0133, Econometric Society.
    • Handle: RePEc:ecm:wc2000:0133
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    More about this item

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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