Trade flows, exchange rate uncertainty and financial depth: evidence from 28 emerging countries

Demir, Firat and Caglayan, Mustafa and Dahi, Omar S. (2012): Trade flows, exchange rate uncertainty and financial depth: evidence from 28 emerging countries.

Abstract

This paper investigates the effects of real exchange rate uncertainty on manufactures exports from 28 emerging economies, representing 82\% of all developing country manufactures exports, and explores the sources of heterogeneity in the uncertainty effects by controlling for the direction of trade (South-North or South-South), and the level of financial development of the exporting country. The empirical results show that for more than half of the countries the uncertainty effect is unidirectional, either South-South or South-North, and the median impact is negative. In addition, while we find that financial development augments trade, exchange rate shocks can negate this effect. Last but not the least, trade among developing economies improves export growth under exchange rate shocks.

• Item Type: MPRA Paper
• Language: English
• Keywords: Trade flows; Exchange rate uncertainty; South-South trade; Financial depth; Manufactured goods trade; Dynamic panel data
• Subjects: F - International Economics > F1 - Trade > F15 - Economic Integration; G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy; F - International Economics > F3 - International Finance > F31 - Foreign Exchange; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O14 - Industrialization ; Manufacturing and Service Industries ; Choice of Technology

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