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

It is commonly argued that exchange rate risk depresses international trade. However, the large literature on this subject has not yet provided conclusive evidence. This paper analyzes why it is so di¢cult to obtain a clear answer from time series analyses. We use data on bilateral aggregate U.S. 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: [email protected]. I thank Harry Huizinga, Siem Jan Koopman and Frank de Jong for their helpful comments. An earlier version of this paper has appeared as CentER Discussion Paper No. 9973.