Exchange Rate Volatility and Regional Trade Agreements in South 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 depending on the measure of volatility used, volatility has either a positive and
significant effect on trade, or volatility does not exert an impact on trade. Second, using sectoral data,
the paper finds that there is no definite effect of volatility on trade.