Impact of exchange rate uncertainty on commodity trade between US and Sweden

Abstract

Previous studies that investigated the effects of exchange rate uncertainty on the trade flows of Sweden employed aggregate trade data either between Sweden and the rest of the world or at bilateral level between Sweden and her major trading partners. In this article, we disaggregate the trade data and employ the import and export data from 87 industries that trade between Sweden and the US. We find that exchange rate volatility has significant short-run effects on the trade flows between the two countries in almost two-third of the industries. However, the short-run effects are translated into the long-run effects in one-third of the cases. Furthermore, the real depreciation of krona against the dollar was found to have favourable effects on the overall trade balance between the two countries.

Acknowledgements

Valuable comments of two anonymous referees are greatly appreciated. Any error, however, is ours.

Notes

¹ It is possible in some industries an estimate of β ₁ to be negative. This would be the case if the increase in Swedish income is due to an increase in import-substitute goods. For more, see Bahmani-Oskooee (1986).

² Indeed, this bounds testing method is the most appropriate method since evidence in Bahmani-Oskooee and Payesteh (1993), Doyle (2001) and De Vita and Abbot (2004) suggests that while the measure of exchange rate volatility is I(0), other variables in the model are I(1).

³ For a more detailed and step by step application of the bounds testing approach, see Bahmani-Oskooee and Tanku (2008). Also note that different variants of trade flow equations (Equations 1 and 3) are employed by different authors. Examples are Briguglio (1989), Rousslang and Leeuwen (1990), Tegene (1991), King (1993), including Alse and Bahmani-Oskooee (1995), Charos et al. (1996), Rahman et al. (1997), Vamvoukas (1999), Mah (2000), Miljkovic et al. (2000), Truett and Dale (2000), Bahmani-Oskooee (2001), Du and Zhu (2001), Kyereme (2002), Dar and Amirkhalkhali (2003), Bahmani-Oskooee and Ratha (2004), Dutta and Ahmed (2004), Agbola and Damoense (2005), Berument and Dincer (2005), Love and Ramesh (2005) and Narayan and Narayan (2005).

⁴ Note that our different findings versus Lee (1999) could partly be due to different model specifications.