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The B.E. Journal of Macroeconomics Contributions Volume 12, Issue 1 2012 Article 9 Exchange Rate Uncertainty and Trade Ching-Yi Lin∗ ∗National Tsing Hua University, lincy@mx.nthu.edu.tw Recommended Citation Ching-Yi Lin (2012) “Exchange Rate Uncertainty and Trade,” The B.E. Journal of Macroeco- nomics: Vol. 12: Iss. 1 (Contributions), Article 9. DOI: 10.1515/1935-1690.2389 Copyright c©2012 De Gruyter. All rights reserved. Exchange Rate Uncertainty and Trade∗ Ching-Yi Lin Abstract This study offers an explanation of the common empirical finding in the literature

off the crisis, however, the benefits of a stimulus measure may well depend on the structural characteristics of an economy. One feature that distinguishes emerging countries from their developed counterparts is the degree of exchange rate pass-through. As the empirical evidence provided by Calvo and Reinhart (2000) indicates, the rate of exchange rate pass-through is much higher in emerging economies. 2 Due to this disparity, the role of fiscal policy in developing countries may differ from that in developed ones. Therefore, it is important for us to understand

1 Introduction The real exchange rate is the cost of goods sold in one country relative to the cost of goods sold in another country. It can reflect differences in the prices of traded goods across countries or differences in the relative price between traded and non-traded goods within each country. The former has important implications for a country’s international competitiveness and is a key variable in the international transmission of business cycles. The latter determines how capital and labor resources are allocated within each country. In a seminal paper

1 Introduction The relation between foreign exchange rate and stock markets has attracted much attention in both international finance and macroeconomics literature. Exchange rate exposure links stock market returns and exchange rates changes. Specifically, it predicts an impact of foreign exchange rate risk on stock prices. The empirical literature on the exchange rate exposure presents only a weak evidence of exposure effect. Early results (see, e.g. Adler and Dumas, 1984 ; Jorion, 1990 and Bodnar and Gentry, 1993 ) show that exchange rate fluctuations

1 Introduction In a lead paper, Meese and Rogoff (1983) tested out-of-sample fit of the existing empirical exchange rate models and they concluded that, in out-of-sample forecasting, a random walk model performs no worse than any estimated structural or time series model. These surprising findings are known in the literature as “Meese- Rogoff Puzzle.” Since then, various attempts have been made to produce results in favor of economic fundamentals or structural models. Studies that re-examine different currency pairs, different time periods, real time versus