Why is it so Di¢cult to Find an E¤ect of Exchange Rate Risk on Trade?

The question whether exchange rate risk a¤ects trade has received considerable attention in the literature. However, the conclusions are still mixed. This paper analyzes why it is so di¢cult to obtain a clear answer from time series analyses. We use data on bilateral aggregate US exports to the other G7 countries. The results show that export decisions are mostly a¤ected by the exchange rate about one year later. The riskiness of the exchange rate at such a long horizon appears fairly constant over time with only short-term ‡uctuations. This makes it di¢cult to discover the true e¤ect of exchange risk on trade from the limited time series data that are typically available. Key words: Exports, risk measurement, imperfect substitutes, distributed lags JEL classi…cation: C22, C51, F14, F31. ¤Department of Economics, Tilburg University, P.O. Box 90153, 5000 LE Tilburg, the Netherlands; tel: +31-13-4668229; fax: +31-13-4663280; E-mail: F.J.G.M.Klaassen@kub.nl. I thank Harry Huizinga, Siem Jan Koopman and Frank de Jong for their helpful comments.

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