The impact of trading costs and exchange rate volatility on bilateral trade : a case study of developed countries and Asia developing countries

Floating exchange rate has recently become more volatile after the collapse of the Bretton Woods system in 1973. Impediments to trade introduce price differentials and deviations from the law of one price and even diminish trade transactions. Uncertainty can be an example of an impediment to trade. The central objective of the thesis has been to analyse trade costs and exchange rate volatility and their role in bilateral trade, with particular reference to developed countries and Asia developing countries. This thesis contains three main parts as follows: Chapter Two investigates the purchasing power parity hypothesis by testing the real exchange rates using the Robinson (1994)’s fractional integration approach as well as conventional unit root tests. Chapter Three is a panel data study on the impact of relative trade barriers on bilateral exports using gravity model. In the first step the impact of the technology factor along with geographical factors, institutional factors on bilateral transportation costs is investigated. In the second step, GMM and an instrumental variable approach are used to tackle the econometric problem of endogeneity. Chapter Four and Five investigates the impact of both real and nominal exchange-rate volatility on the UK aggregate and disaggregate bilateral trade flows.