DOES EXCHANGE RATE VOLATILITY AFFECT TRADE? EVIDENCE FROM SEVERAL EUROPEAN COUNTRIES

The paper examines whether exchange rate volatility had affected negatively the trade flows bilaterally between Belgium. France. Greece. Italy, Netherlands. Portugal, Spain, the United Kingdom and Germany since the inception of the European Monetary System in 1979. The exchange rate volatility variable is derived from the Exponential Generalized Autoregressive Conditionally Heteroskedastic in-Mean model. This variable is next used as a proxy for exchange rate uncertainty in an error-correction model in order 10 investigate its impact on a country's import flows from Germany, along with several other variables. The results indicate that short-run volatility did not have any deleterious effects on the volume of bilateral trade, despite the fact that exchange rate volatility had increased noticeably for most of the exchange rates.