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Title:Exchange rate uncertainty and trade growth: a comparison of linear and nonlinear (forecasting) models PDF Logo
Authors:Herwartz, Helmut
Weber, Henning
Issue Date:2007
Series/Report no.:SFB 649 discussion paper 2007,042
Abstract:A huge body of empirical and theoretical literature has emerged on the relationship between foreign exchange (FX) uncertainty and international trade. Empirical findings about the impact of FX uncertainty on trade figures are at best weak and often ambiguous with respect to its direction. Almost all empirical contributions assume and estimate a linear relationship. Possible nonlinearity or state dependence of causal links between FX uncertainty and trade has been mostly ignored yet. In addition, widely used regression models have not been evaluated in terms of ex-ante forecasting. In this paper we analyze the impact of FX uncertainty on sectoral categories of multilateral exports and imports for 15 industrialized economies. We particularly provide a comparison of linear and nonlinear models with respect to ex-ante forecasting. In terms of average ranks of absolute forecast errors nonlinear models outperform both, a common linear model and some specification building on the assumption that FX uncertainty and trade growth are uncorrelated. Our results support the view that the relationship of interest might be nonlinear and, moreover, lacks of homogeneity across countries, economic sectors and when contrasting imports vs. exports.
Subjects:exchange rate uncertainty
GARCH
forecasting
international trade
nonlinear models
JEL:F14
F17
Document Type:Working Paper
Appears in Collections:SFB 649 Discussion Papers, HU Berlin

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