Does real exchange rate volatility affect sectoral trade flows?, Sheffield economic research paper series 2008011

This paper investigates empirically the effect of real exchange rate volatility on sectoral bilateral trade flows between the US and her top thirteen trading countries. Our investigation also considers those ef-fects on trade flows which may arise through changes in income volatil-ity and the interaction between income and exchange rate volatilities. We provide evidence that exchange rate volatility mainly affects sec-toral trade flows of developing but not that of developed countries. We also find that the effect of the interaction term on trade flows is op-posite that of exchange rate volatility yet there is little impact arising from income volatility. JEL: F17, F31, C22