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Abstract
This paper explores the effect of exchange rate volatility and of the institutional quality on
international trade flows of transition economies in Central European Countries by applying a
gravity model of balance panel between 1999 and 2008. The results show that nominal
exchange rate volatility has had a significant negative effect on trade by applying Psuedo-
Maximum-Likelihood (PML) estimator method over this period. The institutional quality
need to be improved in case of size of government and the quality of regulation. The negative
effect of exchange rate volatility on agricultural exports suggests that joining Central
European Countries to the euro zone can reduce the negative effects of exchange rate
volatility on trade.