Exchange-rate volatility and sweden's trade with germany: Evidence from industry data

Previous literature studying countries' industry-level responses to exchange-rate volatility shows that only a fraction of trade flows are reduced by this risk. Significant increases have often been found for certain country pairs, and a lack of any discernable impact is even more prevalent. This study examines trade between Sweden and Germany, using annual data from 1979 to 2010 for 131 export and 150 import industries. Applying the "bounds testing" approach to cointegration, we find that a large majority of industries show no evidence of a long-run relationship between trade flows and their theoretical determinants. Of those that do, roughly half of export and import industries are affected in the long run by volatility, primarily negatively. Further industry-level analysis shows that while durable goods are no more or less likely to be significantly impacted by variability, Swedish imports show a pattern in which small industries are most affected. Large German exporters seem particularly insulated from these trade flows' theoretical determinants. JEL Classification: F31.