Exchange Rate Sensitivity of Korea-US Bilateral Trade: Evidence from Industrial Trade Data

An autoregressive distributed lag (ARDL) approach to cointegration is used to examine the dynamic effects of changes in the bilateral exchange rate on changes in the bilateral exports and imports of disaggregating 71 products between Korea and the United States. Results show that while Korean exports are highly sensitive to the U.S.. income and less to the bilateral exchange rate change in both the short- and long-run. Korean imports are driven largely by the income of Korea and, to some extent, by the bilateral exchange rate. It is also found that the empirical results obtained from aggregated data of trade are at odds with our findings of disaggregated data, providing partial evidence of the aggregation bias problem, as well as the importance of use of disaggregating data in bilateral trade models.