Trade Flows, Exchange Rate Uncertainty And Financial Depth: Evidence From 28 Emerging Countries

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Executive Summary

The authors investigate the effects of real exchange rate uncertainty and financial depth on manufactures exports from 28 emerging economies to the North and South over 1978-2005. They estimate a dynamic panel model using system GMM approach and show that for the majority of countries in the sample exchange rate uncertainty affects both South-South and South-North trade negatively. Furthermore, for several cases they discover that this effect is unidirectional, that is South-South or South-North. In addition, they find that while financial depth plays a trade-enhancing role, exchange rate shocks can negate this effect.

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