<p> </p><p>This paper evaluates the effect of exchange rate risk on the sum of bilateral trade. To distinguish the effect between different types of countries, two groups are defined: advanced and developing economies. Economic theory on exchange rate risk and trade proposes ambiguous effects of increased volatility. However, the ex ante hypothesis is that developing economies are more sensitive to volatility. Contrarily to the hypothesis, the empirical results suggest that advanced economies would benefit up to twice as much from a removal of exchange rate risk. The lower sensitivity of developing countries to exchange rate risk is conjectured to be due to a lower real average income of firms in these areas. The empirical analysis is based on an extended gravity model, which is estimated and subsequently tested for robustness using four different techniques. All estimates imply that exchange rate volatility depresses bilateral trade flows. Further, the result that developing countries are less sensitive to exchange risk is not affected by different specifications of our model.</p><p> </p>
| Identifer | oai:union.ndltd.org:UPSALLA/oai:DiVA.org:uu-88331 |
| Date | January 2009 |
| Creators | Grip, Johan, Karadja, Mounir |
| Publisher | Uppsala University, Department of Economics, Uppsala University, Department of Economics |
| Source Sets | DiVA Archive at Upsalla University |
| Language | Swedish |
| Detected Language | English |
| Type | Student thesis, text |
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