This study captures the impact of real bilateral exchange rate volatility on trade. A sectoral gravity model is estimated under two different measures of exchange rate volatility. Results show that a reduction in exchange rate volatility, an increase in the country’s income, and a reduction in trade tariffs can increase bilateral trade in Mercosur. This study suggests the inclusion and implementation of common, stable, and integrated policies among Mercosur countries, aiming to reduce the adverse effects of the exchange rate volatility on bilateral trade among these countries.
bilateral trade; exchange rate volatility; panel econometrics; gravity models; Mercosur
