How Does Exchange Rate Uncertainty interact with International Trade? A Meta-Analysis Revisited

Abstract

Several factors have been highlighted to explain the controversial effect of exchange rate uncertainty on international trade. However, the empirical evidence is rather mixed. The main focus of this paper is to reconcile the apparently conflicting results from 59 studies published between 1984 and 2014. We found that the interaction between the two variables is likely to be ambiguous when measured in real rather than in nominal terms, when using “naïve models” rather than GARCH extensions as volatility measurement and when less developed countries are considered. Intuitively, the lack of clearer evidence may be also attributed to the scarcity of studies addressing the robustness of this relationship along several econometric methods and to the fact that neither the exchange rate policy nor the trade policy can be designed without considering regulatory and instrumental factors, which are unfortunately excluded in the majority of researches. To find better paths, further researches should focus on the new methods based on additional variables such as institutional quality proxies and financial development indicators