Exchange Rate Volatility and Trade Flows

Abstract

The purpose of this thesis is to investigate and analyze the effect of exchange rate volatility between the euro and the Mexican peso on the exports from the first eleven euro area countries (EA-11) to Mexico. The ten product groups recognized by the Standard International Trade Classification (SITC) are dealt with separately in identifying the influence of exchange rate volatility on the exports. Aggregated data for exchange rates and trade between 1999 and 2008 are analyzed using regressions. In addition to the exchange rate volatility, the variables included in the analysis are: the industrial production index (IPI) of the EA-11 countries, the IPI for Mexico, the nominal exchange rate between the two currencies, the consumer price index (CPI) in Mexico and the harmonized indices of consumer prices (HICPs) for the EA-11. The reaction of trade to exchange rate volatility is a fundamental issue in macroeconomics. It has taken more importance in the recent decades as the scope of international transactions has expanded and the economic activity of one country affects other countries. There have been several studies about the relation between the exchange rate volatility and its influence on trade that have arrived to different results. The conclusion of this thesis is that the exchange rate volatility has a positive and highly significant effect in the exports of only one of the ten evaluated product groups.