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as depending positively on the size of the economy which is most often represented by GDP and negatively on their geographical distance from each other. Other variables such as population sizes are often included and the use of dummy variables to account for common characteristics which has the possibility of increasing trade between the two countries for example common language or common border. Pugh and al.(1999) use gravity model and panel data for 16 OECD countries within the period 1980-1992 and found that exchange rate volatility leads to a decrease in the level of trade by 8 percent points. Along the same line, the work of Dell'Ariccia(1999) suggest a significant and substantially negative impact of exchange rate volatility on bilateral trade flows of the 15 EU members and Switzerland for the period 1975-94. He also found that the elimination of the exchange rate volatility would lead to an increase of 10 percent in trade. Rose(2000) also bases his analysis on a gravity model of bilateral trade for 186 countries for the five years 1970, 1975, 1980, 1985, and 1990. His primary measure of volatility is the standard deviation of the first difference of the monthly logarithm of the bilateral nominal exchange rate, which is computed over the five years preceding the year of estimation. His finding is that exchange rate volatility has a significant negative effect on trade. Rose in another research paper provides empirical evidence that the adoption of a common currency has a substantial impact on trade flows. He finds that countries sharing a common currency, trade around three times more than countries outside a monetary union and this discovery was entitled the rose effect. Rose and Engel (2002) and Glick and Rose (2002) also found empirical evidence in support of rose previous findings.

The above discussion shows that the effect of exchange rate volatility on trade volume is a priori ambiguous from theoretical and empirical perspective. Hence we will carry out an empirical investigation on this issue for bilateral trade between Mauritius and the United States.

第三章:研究方法Chapter 3: Research Methodology

3.1 介绍——3.1 Introduction

It can be concluded from the literature review that there have been mixed results from investigations carried out by investigators. The results varied from country to country and with the methodology used. The aim of this chapter is to specify and explain the model used to test the effect on exchange rate in volatility on the volume of trade in Mauritius. That is we will assess whether exchange rate volatility has a significant impact on the volume of trade and whether it is a positive or negative effect.

3.2 人口研究和数据源——3.2 Population studied and data source

For the analysis, time series data will be used and will consist of annual data for the period 1978-2008. Also bilateral trade between the USA and Mauritius will be considered. The United States is among the top trading partners of Mauritius. Also exchange rates the rupees and the dollar is avai

3.3 模型设定——3.3 Model specification

To test the effect of exchange rate volatility a theoretical model is developed to capture the impact of variability in exchange rate on exports and imports. Hence for our analysis two functions are