Why is it so difficult to find an effect of exchange rate risk on trade?

It is commonly argued that exchange rate risk hampers 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. ex...

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Bibliographic Details
Published in:Journal of international money and finance 2004-09, Vol.23 (5), p.817-839
Main Author: Klaassen, Franc
Format: Article
Language:English
Subjects:
Distributed lags
Economic models
Exports
Foreign exchange rate risk
Foreign exchange rates
Imperfect substitutes
Risk measurement
Studies
Time series
US exports
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Summary:It is commonly argued that exchange rate risk hampers 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, as far as the exchange rate is concerned, export decisions are mostly affected by the probability distribution of the about one-year-ahead rate. 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 rate risk on trade from the time series data that are typically available.
ISSN:0261-5606
1873-0639
DOI:10.1016/j.jimonfin.2004.03.009