Exchange Rate Volatility and Trade: External Exchange Rate Volatility Matters

Using World Bank’s Exporter Dynamics Database, we investigate the role of external exchange rate volatility on export in addition to the effect of bilateral exchange rate volatility. The results show that while the bilateral exchange rate volatility has depressing effect on export, external exchange rate volatility generates trade-promoting effect. However, the magnitude of the effect depends on the trade intensity between countries and the economic development of the destination country. We further find strong asymmetric effect that both the trade-depressing effect of the bilateral volatility and trade-promoting effect of the external volatility are larger for exchange rate depreciations and for larger swings in the volatilities.