The effects of exchange rate volatility on international trade flows: evidence from panel data analysis and fuzzy approach

Nuroglu, Elif and Kunst, Robert M. (2012): The effects of exchange rate volatility on international trade flows: evidence from panel data analysis and fuzzy approach. Published in: Zbornik radova Ekonomskog fakulteta u Rijeci. Proceedings of Rijeka Faculty of Economics: Journal of Economics and Business , Vol. 30, No. 1 (2012): pp. 9-31.

Abstract

The aim of this paper is to analyze the effects of exchange rate volatility on international trade fl ows by using two different approaches, the panel data analysis and fuzzy logic, and to compare the results. To a panel with the crosssection dimension of 91 pairs of EU15 countries and with time ranging from 1964 to 2003, an extended gravity model of trade is applied in order to determine the effects of exchange rate volatility on bilateral trade fl ows of EU15 countries. The estimated impact is clearly negative, which indicates that exchange rate volatility has a negative infl uence on bilateral trade fl ows. Then, this traditional panel approach is contrasted with an alternative investigation based on fuzzy logic. The key elements of the fuzzy approach are to set fuzzy decision rules and to assign membership functions to the fuzzy sets intuitively based on experience. Both approaches yield very similar results and fuzzy approach is recommended to be used as a complement to statistical methods.

• Item Type: MPRA Paper
• Language: English
• Keywords: linguistic modeling, fuzzy relations, exchange rate volatility, bilateral trade, gravity model
• Subjects: C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C23 - Panel Data Models ; Spatio-temporal Models; F - International Economics > F1 - Trade > F14 - Empirical Studies of Trade

References

Akhtar M.A., Hilton R.S. (1984) Effects of Exchange Rate Uncertainty on German and US Trade, Federal Reserve Bank of NewYork Quarterly Review, 9(1), pp. 7-16.

Aliev R. A. et al., 2004. Soft Computing and its Applications in Business and Economics, Springer Verlag: Berlin Heidelberg.

Baccheta P., van Wincoop E. (2000) Does Exchange Rate Stability Increase Trade and Welfare?, The American Economic Review, 90(5), pp. 1093-1108.

Benčina J. (2007) The use of fuzzy logic in coordinating investment projects, Zbornik radova Ekonomskog fakulteta u Rijeci, 25 (1), pp. 113-140.

Bubula A., Otker-Robe I. (2003) Are Pegged and Intermediate Exchange Rate Regimes More Crisis Prone?, IMF Working Paper.

Cushman D. O. (1983) The Effects of Real Exchange Rate Risk on International Trade, Journal of International Economics, 15(1), pp. 45-63.

De Grauwe P., de Bellefroid B. (1987), Long run exchange rate variability and international trade, in: S. Arndt, J.D. Richardson (eds.), Real Financial Linkages Among Open Economies, London: MIT Press.

Driankov D. et al., (1996). An Introduction to Fuzzy Control, Berlin-Heidelberg-NewYork: Springer.

Ethier W. (1973) International Trade and the Forward Exchange Market, American Economic Review, 63(3), pp. 494-503.

Fischer S. (2001) Distinguished Lecture on Economics in Government: Exchange Rate Regimes: Is the Bipolar View Correct?, The Journal of Economic Perspectives, 15(2), pp. 3-24.

Fu K.-S., Yao J. T. P. (1980) Application of Fuzzy Sets in Earthquake Engineering, Working Paper Purdue University, CE-STR-80-11.

Gotur P. (1985) Effects of Exchange Rate Volatility on Trade, IMF Staff Papers, 32, pp. 475- 512.

Hsiao C., (2003). Analysis of Panel Data, Cambridge: Cambridge University Press.

Hooper P., Kohlhagen S. W. (1978) The effects of Exchange Rate Uncertainty on the Prices and Volume of International Trade, Journal of International Economics, 8(4), pp. 483-511.

Huang R. R. (2007) Distance and trade: disentangling unfamiliarity effects and transport cost effects, European Economic Review, 51, pp. 161-181.

International Monetary Fund (1984) Exchange Rate Volatility and World Trade: A Study by the Research Department of the IMF, Occasional Paper, 28.

Kenen P. B., Rodrik D. (1986) Measuring and Analyzing the Effects of Short-term Volatility in Real Exchange Rates, Review of Economics and Statistics, 68, pp. 311-315.

Kowalski P. (2006). The Impact of the Economic and Monetary Union in the EU on International Trade- A Reinvestigation of the Exchange Rate Volatility Channel, Ph.D Thesis, University of Sussex.

Krugman P. R., Obstfeld M., (2006). International Economics: Theory and Policy, London: Pearson Addison Wesley.

Lane P.R., Milesi-Ferretti G. M. (2002) External Wealth, the Trade Balance and the Real Exchange Rate, European Economic Review, 46, pp. 1049-1071.

Lee V. C.S., Wong H. T. (2007) A Multivariate Neuro-fuzzy System for Foreign Currency Risk Management Decision Making, Neurocomputing, 70, pp. 942-951.

McNeill F. M., Thro E., (1994). Fuzzy Logic: A Practical Approach, London: Academic Press Limited.

Oyuk E. et al. (2007) The Impact of Exchange Rates on International Trade in Europe from 1960s till 2000 Using a Modified Gravity Model and Fuzzy Approach, in: Proceedings of the 9th International Symposium on Operations Research, 26–28 September, Nova Gorica, Slovenia, pp. 219-224.

Tseng F.-M. et al. (2001) Fuzzy ARIMA Model for Forecasting the Foreign Exchange Market, Fuzzy Sets and Systems, 118, pp. 9-19.

Viane J.-M., de Vries C. G. (1992) International Trade and Exchange Rate Volatility, European Economic Review, 36(6), pp. 1311-21.

Zadeh L. A. (1973) Outline of a new approach to the analysis of complex systems and decision processes, IEEE Transactions on Systems, Man and Cybernetics, 3, pp. 28-44.

Zadeh L.A. (1975) The concept of a linguistic variable and its application to approximate reasoning – I, Information Science, 8, pp. 199-249.

Zimmermann H. J., (2001). Fuzzy Set Theory and its Applications, USA: Kluwer Academic Publishers.