INFLUENCE OF EXCHANGE RATE ON FOREIGN TRADE INDICATORS: METHODOLOGICAL ISSUES

The article is dedicated to methodological issues that inevitably emerge if to begin the analysis of influence of the exchange rate on external trade. The author points out that before choosing an appropriate econometric tool for such analysis we have to make clear several principal questions. First of them is that we have four methods of measuring exports (imports) - customs statistics, balance of payments method, data of the trade partners (so-called mirror statistics) and external trade in terms of value added. All of them are not consistent with each other not just in data but even in its dynamics. The author believes that none of them is correct enough for a scientifically correct analysis. The next problem: in what prices (current or constant) the external trade should be measured? No doubt, the data in current prices misrepresents the real processes. Unfortunately, when the trade data in constant prices is used nobody takes care that the exchange rate fluctuations reflect current prices dynamics and respectively there are no attempts to adjust it somehow to constant prices. But if we use trade data in constant prices and exchange rates are somehow modified to comply with constant prices data, so it is doubtful that the created model reflects real relationships. Another methodological problem is the immanent presence of the exchange rate data series within the trade time series. That happens because actual external trade is served by different currencies, while the aggregate data is calculated in a single currency (national currency or US dollars). To make an aggregate data a substantial part of a country's trade must be recalculated into one currency by using exchange rate data. So, when we use two time series - trade and exchange rate, in fact the latter is present in both time series. Respectively, results of the correlation analysis of such pairs are likely misrepresent the actual relationships between two variables. However, the arguments of the external trade policy-makers when they blame some countries for benefiting of undervalued exchange-rates are based on different approach. These arguments cannot be affected by the above mentioned methodological problems which face any science-based research. Within the trade policy arguments they just take into account some coincidence between foreign trade dynamics (in current prices) and exchange rates fluctuation. Once observed this coincidence is proliferated to all cases and all countries. The author offers its own methodology of how to check particularly those correlations between exchange rates and trade flow dynamics, which are most often asserted by the policy makers.