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

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  • Klaassen, F.J.G.M.

    (Tilburg University, Center For Economic Research)

Abstract

The question whether exchange rate risk a¤ects trade has received considerable attention in the literature. However, the conclusions are still mixed. This paper analyzes why it is so difficult to obtain a clear answer from time series analyses. We use data on bilateral aggregate US 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.
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Suggested Citation

  • Klaassen, F.J.G.M., 1999. "Why is it so Difficult to Find An Effect of Exchange Rate Risk on Trade?," Discussion Paper 1999-73, Tilburg University, Center for Economic Research.
    • Handle: RePEc:tiu:tiucen:a505c047-b2cf-4c2b-a7ea-8afcf6da30a2
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    More about this item

    Keywords

    Exports; risk measurement; imperfect substitutes; distributed lags;
    All these keywords.

    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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