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Chongcheul Cheong
''Does the risk of exchange rate fluctuation really affect international trade flows between countries?''
( 2004, Vol. 6 No.4 )
This paper investigates the effect of exchange rate volatility on the UK's import trade. As part of econometric problems arising from a measured volatility, we consider a special case when an ARCH type auxiliary model is used to measure uncertainty in the exchange rate, and discuss a procedure for the correct inference of the OLS estimates of a primary equation in the second stage, which includes the generated variable. By applying this two-step approach, we find a statistically significant, negative impact of exchange rate uncertainty on Britain''s imports.
Keywords: ARCH model Consistent OLS estimation Exchange rate fluctuations International trade
JEL: F1 - Trade: General
Manuscript Received : May 02 2004 Manuscript Accepted : May 04 2004

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