The effects of exchange rate volatility on price competitiveness and trade volumes in the UK: A disaggregated approach

This paper investigates dynamic interrelations between exchange rate uncertainty, trade volumes, and price competitiveness, using sectoral data on UK manufacturing exports. The results suggest that when there is an unexpected fluctuation in exchange rates, exporters adjust to the change in the level of risk by increasing export prices and by decreasing trade volumes, but prefer to directly reduce trade volumes rather than to increase prices. The extent of each response depends, however, on the nature of the market in which the goods are traded. This evidence implies that if the UK adopts the euro, there will be a positive impact on the country's export trade and economic performance.