Impact of Exchange Rate Uncertainty on Trade Flows: Evidence from Commodity Trade between the United States and the United Kingdom

摘要

An argument against floating exchange rates is that such rates introduce uncertainty into the international arena that could hurt trade flows. Previous studies that have attempted to test empirically the impact of exchange rate uncertainty or volatility on the trade flows employed aggregate trade data and provided mixed results. Most of them suffer from a spurious regression problem since they did not consider the integrating properties of the variables involved. A few studies assumed that all variables, including a measure of exchange rate volatility, have unit roots so that they can proceed and apply cointegration techniques to their models. The main purpose of this paper is twofold. First, unlike previous research, in order to avoid the aggregation bias problem, we use disaggregated trade data at the commodity level to determine whether exchange rate volatility has a detrimental effect on commodity trade between the UK and the US. Second, we employ a bounds testing approach to cointegration and error-correction modelling to avoid pre-unit-root testing of variables. Indeed, the variables could be integrated of order zero (e.g. volatility measure of the exchange rate) or order one (e.g. trade flows). Annual data over the 1971-2003 period for 177 commodity trades are employed in the analysis. The results reveal that the volatility of the real bilateral dollar-pound rate has a short-run significant effect on imports of 109 and exports of 99 industries. In most cases, such effects are adverse. In the long run, however, the number of significant cases is somewhat reduced. Indeed, in the long run, imports of 62 and exports of 86 industries are significantly affected by exchange rate volatility. Again, in a majority of cases the effect is negative, supporting the opponents of floating rates. Furthermore, the affected industries do not seem to have any specific commodity attribute. There are durable and non-durable good as well as small and large industries affected.