Abstract
In an effort to better understand the determinants of trade flows worldwide, researchers have recently incorporated external volatility (in addition to that of the partners’ bilateral exchange rate) into their models. The so‐called ‘third country’ effect is present if adding this term changes the bilateral volatility estimates that are found when external volatility is omitted. This study examines US exports to Hong Kong for 143 industries, and imports from Hong Kong for 110 industries, and finds two key results. First, expected inflation due to Hong Kong's dollar peg leads to increased US exports in a large number of industries. Second, comparing our results with those of a previous study shows strong evidence of a ‘third country’ effect, especially for US imports. Nonparametric tests suggest that these effects differ by sector: for both exports and imports. Manufacturing industries that enjoy a large trade share are less likely to experience this effect once external volatility is incorporated into the analysis.
Acknowledgements
Valuable comments of an anonymous referee are greatly appreciated. Any error, however, is ours.
Notes
1 For other applications of this approach see Bahmani‐Oskooee et al. (2005), Bahmani‐Oskooee and Hegerty (Citation2007), Halicioglu (2007), Narayan et al. (2007), Tang (Citation2007), De Vita and Kyaw (2008), Mohammadi et al. (2008), Payne (2008), Wong and Tang (2008) and Bahmani‐Oskooee and Gelan (Citation2009).
2 Other papers dealing with currency depreciation and trade flows for other countries include Briguglio (1990), Cushman (1990), Tegene (1991), Buluswar et al. (1996), Rahman et al. (1997), Nachane and Randae (1998), Miljkovic et al. (2000), Kyereme (Citation2002) and Berument and Dincer (Citation2005).
3 Diagnostic statistics for these regressions are available from the authors upon request.
4 For details of biserial coefficients see Chiang (Citation2003, p. 302).