Exchange rate risk and commodity trade between the US and India

Floating exchange rates are said to introduce volatility into the foreign exchange market that could deter trade flows. Previous research employed aggregate import and export trade data and provided mixed results. In this paper we disaggregate the trade data between the U.S. and the emerging economy of India and use the bounds testing approach to cointegration and error-correction modeling to show that in 40 industries that trade between the two countries, exchange rate volatility has negative and positive effects in 40% of industries, in the short run. These short-run effects, however, do not last into the long run in many cases.