Trade Effects of Exchange Rate Fluctuations: Evidence from Sweden

DALARNA UNIVERSITY

Trade Effects of Exchange Rate Fluctuations: Evidence from Sweden

Master Thesis in Economics Department of Economics and Social Sciences Fall 2007

Supervisor: Reza Mortazavi, Ph.D. Author: Sherzod Yarmukhamedov

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To my father

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ABSTRACT An overview of the theoretical literature for the last two decades suggests that there is no clear-cut relationship one can pin down between exchange rate volatility and trade flows. Analytical results are based on specific assumptions and only hold in certain cases. Especially, the impact of exchange rate volatility on export and import activity investigated separately leads also to dissimilar conclusions among countries studied. The general presumption is that an increase in exchange rate volatility will have an adverse effect on trade flows and consequently, the overall heath of the world economy. However, neither theoretical models nor empirical studies provide us with a definitive answer, leaving obtained results highly ambiguous and inconsistent (Baum and Caglayan, 2006). We purposed to empirically investigate trade effects of exchange rate fluctuations in Sweden from the perspective of export and import in this research. The data comprises period from January 1993 to December 2006, where export and import volumes are considered from the point of their determinants, including exchange rate volatility, which has been measured through EGARCH model. The results for the case of Sweden show that short run dynamics of volatility negatively associated with both export and import, whereas considered from the case of previous period volatility it exhibits positive relationship. These results are consistent with the most findings of prior studies, where the relationship remained ambiguous. Keywords: Exchange rate volatility, EGARCH, export and import.

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LIST OF CONTENTS 1 4 4 10 12 13 18 19 19 20 23 26 28 31

1. INTRODUCTION

2. THEORETICAL AND METHODOLOGICAL FRAMEWORK 2.1 2.2 2.3 2.4...