Exchange rate volatility and regional trade agreements in Southern Africa

Exchange rate volatility is often perceived to cause a reduction in the overall level of trade. In view of the proliferation of rapid regional trade agreements in recent years, the unpredictability of exchange rate has prompted many economists to investigate the effects of the volatile nature of exchange rate on trade. Previous studies have neglected the sectoral data, focusing instead on the aggregate trade flows which may have led to incomplete conclusions. The present paper aims to fill this lacuna by employing a proper specification of the gravity model using a panel of 95 countries that trade with South Africa over the period 2000–2017. Two major findings emerge. First, using aggregate data, the results suggest that nonlinear volatility has a positive and significant effect on trade, whereas linear volatility does not exert any impact on trade. Second, using sectoral data, the paper finds that there is no definite effect of volatility on trade.