The Risk of Exchange Rate Movements and Trade between Korea and US

This paper examines a possible impact of exchange rate risk on international trade by focusing on the econometric issue related to the risk variable measured. Specifically, we discuss a two-step procedure of consistent and efficient OLS estimation for the export equation which includes the variable generated by an ARCH type model for the risk in exchange rate fluctuations. Then, the procedure is applied to the case of Korean bilateral exports to the US. The empirical results indicate that volatility in the won-dollar real exchange rate has a negative impact on Korea s exports to U.S. and that the effect is statistically significant. This evidence of OLS estimation is also similar with the one obtained by IV-GMM estimation. The result provides an implication for the most recent US blame that Korea is one of the currency manipulating countries with China and Japan.