Our analysis focuses on the one step forecasting horizon. As direction of future research it
appears fruitful to also compare alternative approaches with respect to forecasting trade
growth conditional on FX uncertainty at longer horizons. In this case, considering medium
and long term measures of volatility becomes particularly imp ortant.
A DATA
A.1 Computation of data series
The computation of real effective FX rates or foreign economic activity requires an appropri-
ate weighting scheme taking the relative importance of trading partners for each member of
the cross section into account. Most appropriately, one would refer to sectoral trade flows to
quantify the sector specific importance of a country as trading partner. For the wide range
of countries analyzed in this study bilateral sectoral trade data is unavailable. To this end,
we follow the procedure in Klein16 and base the computation of weights on aggregate trade
data that are available on a bilateral basis. This implies that weights are constant across
sectors. The weight wkl attached to a partner country I is the ratio of aggregate bilateral
exports from country k to the partner I, akl, divided by the sum of country k’s exports
to all partner countries. Although the latter weights vary over time we use time invariant
measures αkl by averaging monthly data over the period 1993:01 to 1998:01. Then, weights
wkl are determined as
akl
wkl = ,
2_ak akl
Wk^=kt = 1, I =1,... 19, k = 1,... 15, I = k .
I
Taking the perspective of country k , our measure of foreign economic activity is accordingly
iPkt = wkl ln (iPlt) , l = k,
l
with iplt denoting industrial production of partner I. Similarly real effective FX rates are
computed as
skltwplt
ekt => ywki ln -------- , I = k,
l wpkt
where sklt is the price of country k’s currency in terms of country l’s currency. As in Baum
et al.9 bilateral nominal FX rates are deflated by means of wholesale price indices.
A.2 Data sources and further comments
Sectoral trade flows and industrial production data are from the OECD databases ”Monthly
Statistics of International Trade” (March 2001) and ”Main Economic Indicators”, respec-
18