Exchange Rates and Trade Flows : An Econometric Analysis of Structural Breaks in the Swedish Trade

Sammanfattning: This study examines the relationship between the real exchange rate and the trade flows of Sweden in the presence of so-called structural breaks. The purpose is rooted in the hypothesis that the real exchange rate has been disconnected from global trade flows in the aftermath of the Global Financial Crisis (GFC) in 2008. Using both aggregated and bilateral trade data from Sweden’s six major trading partners from the period 2004 to 2018, significant breaks are detected in 10 out of 14 cases by the Bai and Perron (1998) approach, indicating that the effect of the exchange rate has changed. However, the breaks are widespread and the coefficient estimates show no clear pattern and hence unequivocal evidence for the hypothesis of a disconnect. Despite the ambiguous evidence, the cointegration tests suggests that there is a long-run relationship between the real exchange rate and trade flows of Sweden.