Working Paper 03-2
by Silvana Tenreyro

What is the effect of nominal exchange rate variability on trade? I argue that the methods conventionally used to answer this perennial question are plagued by a variety of sources of systematic bias. I propose a novel approach that simultaneously addresses all of these biases, and present new estimates from a broad sample of countries from 1970 to 1997. The answer to the question is: Not much.

This paper was revised in April 2004.

JEL classfication codes: C21, F10,F11, F12, F15

Keywords: exchange rate volatility, trade, gravity equation, heteroskedasticity, Poisson regression, instrumental variable

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