| This study uses disaggregated trade data for the United States and United Kingdom at the industry level to investigate the link between exchange rate volatility and trade flows. The analysis uses the standard deviation of the real exchange rate as a proxy for exchange rate risk or uncertainty. Using the Auto Regressive Distributed Lag (ARDL) cointegration approach, which is applicable regardless of the order of integration of the underlying regressors, export and import equations are estimated using annual data over the 1971-2003 period for 177 industries. The results show that one third of the industries in the import demand model and more than half of the industries in the export demand model provide significant and negative results while the rest of the industries show no response to exchange rate volatility in the long-run. In general, the results suggest that exchange rate volatility affects different industries differently. |
