The effects of real exchange rate risk on international trade

Abstract

By assuming real profit maximization, and uncertain prices as well as exchange rates, we conclude that it is uncertain percentage changes in the real exchange rate that are risky in international trade. Empirical estimation of fourteen bilateral trade flows among industrialized countries finds a significant negative effect on trade quantity from such risk in a number of these cases. The expectation variable has a positive effect in a larger number of cases. Significant price effects from the expectation variable are fewer and from risk are negligible.