Exchange rate risk and international trade: The role of third country effect

Using the recently launched Exporter Dynamics Database of the World Bank, this paper empirically investigates the role of external exchange rate risk (third-country effect) on trade flows between countries. We find a strong positive influence of external exchange rate risk on exports to a specific destination. However, the effect is more observable in advanced destination countries, countries with low bilateral exchange rate volatility in comparison to external exchange rate volatility, and countries in which export is concentrated among a small number of firms. •We find that third-country exchange rate volatility has significant positive impact on export.•The effect is more observable in advanced than developing destination countries.•The effect is larger if bilateral volatility is smaller than the external volatility.•It also magnifies if export is concentrated among a small number of firms.