The volatility of international trade flows and exchange rate uncertainty∗

Empirical evidence obtained from data covering Eurozone countries, other industrialized countries, and newly industrialized countries (NICs) over 1980– 2006 shows that exchange rate uncertainty has a consistent positive and significant effect on the volatility of bilateral trade flows. A one standard deviation increase in exchange rate uncertainty leads to an eight per cent increase in trade volatility. These effects differ markedly for trade flows between industrialized countries and NICs, and are not mitigated by the presence of the Eurozone. Contrary to earlier findings, our results also suggest that exchange rate uncertainty does not affect the volume of trade flows of either industrialized countries or NICs. ∗We gratefully acknowledge the British Academy’s support under grant RB114639. The standard disclaimer applies. Corresponding author: Christopher F. Baum, Department of Economics, Boston College, Chestnut Hill, MA 02467 USA, Tel: +1-617-552-3673, fax +1-617-552-2308, e-mail: [email protected].