To What Extent Do Exchange Rates and their Volatility Affect Trade?

JEL classification
: F1, F31, O24, Q17 
Acknowledgements 
This paper was prepared by Marilyne Huchet-Bourdon, Associate Professor at 
Agrocampus Ouest, Rennes and Jane Korinek of the OECD Trade and Agriculture 
Directorate under the direction of Frank van Tongeren, Head of the Policies in Trade and 
Agriculture Division. The authors wish to thank participants at an internal OECD/TAD 
seminar for helpful comments and discussion and Joanna Komorowska for statistical 
assistance. All errors and omissions are the sole responsibility of the authors.

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 TO WHAT EXTENT DO EXCHANGE RATES AND THEIR VOLATILITY AFFECT TRADE – 
3
OECD TRADE POLICY WORKING PAPER NO. 119 © OECD 2011 
 
Table of contents 
Executive Summary ...................................................................................................................... 4
I.
Introduction ......................................................................................................................... 6
II. 
Exchange rates and trade: what does the theory tell us? ...................................................... 7
III. 
Insights from the empirical literature ................................................................................ 10
IV. Developments in exchange rates and trade between China, the Euro area
and the United States ........................................................................................................ 11
V.
Impact of exchange rates and their volatility on trade flows ............................................ 14
VI.
Conclusions ........................................................................................................................ 23
 
Tables 
Table 1. Estimated long-run effects on trade of a 10% depreciation in the national currency ..... 20
Table 2. Estimated long-run elasticities of exchange rate volatility with respect to trade ............ 21
Table D.1. Results with GARCH volatility .................................................................................. 35
Table D.2. Results with five-year standard deviation volatility measure ..................................... 35
Table E.1. Estimated short-run effects of import function (vol= GARCH).................................. 36
Table E.2. Estimated short-run effects of export function (vol= GARCH) .................................. 37
Table E.3. Estimated short-run effects of import function (vol= 5-year MSD) ............................ 38
Table E.4. Estimated short-run effects of export function (vol = 5-year MSD) ........................... 39
Table F.1. Estimated long-run effects –Import model (vol=GARCH) ......................................... 40
Table F.2. Estimated long-run effects –Export model (vol=GARCH) ......................................... 41
Table F.3. Estimated long-run effects –Import model (vol = 5-year MSD) ................................. 41
Table F.4. Estimated long-run effects –Export model (vol = 5-year MSD) ................................. 42
Table G.1. Diagnostic tests with GARCH volatility measure ...................................................... 43
Table G.2. Diagnostic tests with five-year moving standard deviation volatility measure .......... 44