The Effects of Exchange‐Rate Volatility on Commodity Trade between the United States and Mexico

Excessive fluctuations in exchange rates often influence trade flows. Theoretically, increased uncertainty may increase or decrease the volume of trade, or leave it unchanged. Using annual export and import data for 102 industries from 1962 to 2004, we analyze both the short‐ and long‐term effects of volatility in the peso/dollar real exchange rate on Mexican trade with the United States. We also investigate the effects of the North American Free Trade Agreement (NAFTA) on this relationship. We find that increased volatility has short‐term effects on the trade flows of most industries but that the long‐term effects are significant (positive or negative) for only one‐third of industries. Most of the significant effects are negative rather than positive.