Exchange-rate volatility in Latin America and its impact on foreign trade

This paper investigates empirically the impact of real exchange-rate volatility on the export flows of eight Latin American countries over the quarterly period 1973-2004. Estimates of the cointegrating relations are obtained using different cointegration techniques. Estimates of the short-run dynamics are obtained for each country utilizing the error-correction technique. The major results show that increases in the volatility of the real effective exchange rate, approximating exchange-rate uncertainty, exert a significant negative effect upon export demand in both the short-run and the long-run in each of the eight Latin American countries. These effects may result in significant reallocation of resources by market participants.