Exchange Rate Volatility and Trade Policy Uncertainty in Thailand’s Bilateral Trade Flows: Evidence from a Structural Gravity Model

Abstract

This article examined the impact of exchange rate volatility (ERV) and trade policy uncertainty (TPU) on bilateral trade flows between Thailand and its major trading partners using a structural gravity trade model. Panel data from 2000 to 2023 were used for the analysis. The model coefficients were estimated using two econometric methods: Poisson pseudo-maximum likelihood (PPML) and ordinary least squares (OLS). Controlling for time-varying and country-specific effects, the findings point to a heterogeneous effect of volatility on bilateral trade. For a sample of countries with strong economic integration, volatility is associated with increased trade. However, volatility harms trade flows in the absence of countries with regional ties, indicating that countries lacking such connections may experience decreased trade efficiency and increased transaction costs. Additionally, TPU from domestic and partner countries has a negative effect on trade flows. The study further found that distance and common borders facilitate trade flows. The analysis contributes to the literature and enriches the discussion on the effect of volatility and TPU on trade using the gravity model.