The Effects of Exchange Rate Volatility on Commodity Trade Flows Between the U.S. and Thailand

Abstract

It is theoretically supported that the volatility of exchange rate may deter trade flows in the case of high risk aversion. Previous empirical literatures studying the effect of exchange rate volatility on trade flows for Thailand mostly have used aggregate trade data. To minimize the aggregation bias, which may occur by offsetting between a significant effect of depreciation on certain industries and an insignificant effect on the others, this paper thus emphasizes on employing disaggregated bilateral trade data between the U.S. and Thailand at commodity level. Using the annual trade data between the U.S. and Thailand from 1971 to 2012 of all commodities available, this dissertation investigates the effect of exchange rate volatility on imports and exports separately to reveal the entire perspective of such relationship. An autoregressive distributed lag (ARDL) approach to cointegration, notably the bounds testing approach to cointegration, within an error-correction modeling framework has been employed for empirical analysis to distinguish the short run effects from the long run effects in each commodity. The findings indicate that in the short run, the volatility of the real Baht-U.S. dollar exchange rate has a significant mixed impact on the trade flows in most commodities. However, less than half of these commodities carry the effect into the long run.