Exchange Rate Volatility and Trade Flows of the U.K. in 1990s *

Abstract

This paper examines the impact of exchange rate volatility on trade flows in the U.K. over the period 1990–2000. According to the conventional approach, exchange rate volatility clamps down trade volumes. This paper, however, identifies the existence of a positive relationship between exchange rate volatility and imports in the U.K. in the 1990s by using a bivariate GARCH-in-mean model. It highlights a possible emergence of a polarized version with conventional proposition that ERV works as an impediment factor on trade flows.