Exchange Rate Effects on the Volume and Variability of Trade Flows

John T. Barkoulas, Christopher F. Baum, Mustafa Caglayan

Research output: Contribution to journalArticlepeer-review

56 Scopus citations

Abstract

This paper investigates the effects of exchange rate uncertainty on the volume and variability of trade flows. Employing a signal extraction framework, we show that the direction and magnitude of importers' and exporters' optimal trading activities depend upon the source of the uncertainty (general microstructure shocks, fundamental factors driving the exchange rate process, or a noisy signal of policy innovations), providing a rationale for the contradictory empirical evidence in the literature. We also show that exchange rate uncertainty emanating from general microstructure shocks and the fundamental factors reduces the variability of trade flows, while that related to a noisy signal of policy innovations increases variability.

Original languageAmerican English
JournalJournal of International Money and Finance
Volume21
StatePublished - 2002

Disciplines

  • Finance

Keywords

  • Exchange rate effects
  • Trade flows
  • Variability
  • Volume

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