Exchange rate volatility and Irish-UK trade, 1979-1992

This study examines how exchange-rate volatility affected Ireland's exports to its most important trading partner, the United Kingdom, from 1979 to 19 92. To ensure reliable inferences regarding income and price elasticities a nd the impact of exchange rate volatility on exports, the time series prope rties of the series used are investigated. The analysis here is conducted a t both aggregate and 2-digit SITC Division levels since exchange rate volat ility can reasonably be presumed to affect sectors differently. Since expec tations matter for exchange rate determination real volatility was generate d according to a first-order GARCH process. Both real and nominal volatilit y were important determinants for over 35% of Irish-UK trade, with positive effects predominating. This may be due to the nature of Irish firms operat ing in a small open economy where they have little option in dealing with i ncreased exchange rate risk except to 'weather the storm' for fear of losin g market share or facing costs of either exit, re-entry, or both.