EXCHANGE RATE VOLATILITY, AND SECTORAL EXPORTS IS THERE A RELATIONSHIP? NEW EVIDENCE FROM THE EU (original) (raw)

This paper examines potential effect of exchange rate volatility for a set of eleven E.U. member countries for sectoral exports for four sectors during the period of 1973-2004. After critically reviewing the empirical literature we are able to conclude that empirical researchers often examine the hypothesis that exchange rate volatility is a major source of risk causing producers to switch their production to domestic markets which reduces the overall level of trade. The review of the literature has identified a wide range of different results with regard to the effects of exchange rate volatility and its potential effects on the level of trade. We utilize standard deviation of the moving average of the logarithm of real exchange rate as a measure of exchange rate volatility. Overall our results have estimated some sectoral effects from volatility to exports indicating a mixed relationship of volatility to trade.