The effects of exchange rate volatility on international trade flows: evidence from panel data analysis and fuzzy approach

The aim of this paper is to analyze the effects of exchange rate volatility on international trade flows by using two different approaches, the panel data analysis and fuzzy logic, and to compare the results. To a panel with the cross-section dimension of 91 pairs of EU15 countries and with time ranging from 1964 to 2003, an extended gravity model of trade is applied in order to determine the effects of exchange rate volatility on bilateral trade flows of EU15 countries. The estimated impact is clearly negative, which indicates that exchange rate volatility has a negative influence on bilateral trade flows. Then, this traditional panel approach is contrasted with an alternative investigation based on fuzzy logic. The key elements of the fuzzy approach are to set fuzzy decision rules and to assign membership functions to the fuzzy sets intuitively based on experience. Both approaches yield very similar results and fuzzy approach is recommended to be used as a complement to statistical methods.