The Effect of Exchange Rate Risk on Foreign Trade

Abstract

This paper explores the effect of exchange rate volatility on international trade flows of European Union Member States by applying a model of a monthly balance panel between 2002 and 2017.Starting from a general modified weighted model, we added some control variable to measure the good governance.After a general analysis of all the European Union countries, we focus on the response of the trade on different partner regions, or various trade goods. By using country fixed effect model, we find that there is an adverse effect of the exchange rate volatility on trade flows for the European Union countries with small differences depending on partner region or the type of the goods trade. Regarding the Governance Indicators we obtain different results, most of them having negative effect but with different statistically significance.