Does exchange rate volatility affect trade? : panel analysis and implications

This paper presents the empirical evidence of how exchange rate volatility affects the flow of export trade. The estimation of this relationship is complicated, due to the endogeneity between exchange rate volatility and trade. To mitigate this issue, I introduce an instrumental variable to the estimation, which is a direct anchor relationship between the currencies of trading partners. The evidence shows that exchange rate volatility is positively associated with the export volume. Additional testing reveals that the impacts of exchange rate shocks on trade differ by income group and the financial development of countries.