No. 145 - Exchange Rate Variability and Trade: Why is it so Difficult to Find Any Empirical Relationship?

The paper discusses why the previous literature has found little evidence of any effect of exchange rate variability on international trade; methodological and statistical issues are discussed. In particular, we compare estimations based on different specifications and using different datasets and show how the results may change depending on the method used. When econometric analysis is conducted accurately, it is found that, indeed, exchange rate variability has had a significant negative impact on trade. The analysis is conducted for manufacturing exports of Italy, France and Germany towards their EMS partners.