The long-run relationship between import flows and real exchange-rate volatility: The experience of eight European economies

This paper provides new evidence on the long-run relationship between imports and exchange-rate volatility in eight European countries. The period examined is 1973:2 through 1995:1. Cointegration analyses are based on Johansen's (1992, 1995) approach and robust single-equation methods. In conformity with theoretical considerations, the major results show that exchange-rate volatility has a significant negative effect on the volume of imports of six countries whereas for Greece and Sweden, it is positive and significant. These findings are reasonably robust in terms of measures of exchange-rate volatility, different estimation methods and membership in the European Exchange-rate Mechanism (ERM). Therefore, it can be argued that exchange-rate volatility will have significant effects on the allocation of resources by market participants and that policy-makers can no longer rely on an import demand with only conventional variables for long-term international trade planning, forecasting and policy formulation.     

An investigation of the effects of exchange rate volatility on exports in East Asia

This study investigates the effects of the exchange rate volatility on the export flows of Indonesia, Malaysia, Republic of Korea, Singapore, Thailand, and the Philippines during 1974–2011. Towards this goal a trade weighted real effective (rather than the bilateral) exchange rate and three different measures of volatility, i.e. obtained from an ARCH model, a GARCH model and a moving-average standard deviation measure are used in this study. Specifically, the export flows between six Asian countries and the rest of the world are investigated rather than focusing on trade with only one country. Our findings reveal that the exchange rate volatility has a significant impact on export flows in the short run as well as in the long run for all the countries in the sample. The impact in the long run is predominantly negative with the exception of Singapore, but in the short run the impact varies across countries. Moreover, our results are robust to the alternative measures of volatility used and most of the findings in the long run and short run are also robust to the crisis period.     

Exchange rate volatility and export growth in Nigeria

This article examines the impact of exchange rate volatility on Nigeria's exports to its most important trading-partner–the United States over the quarterly period January 1980 to April 2001. Using cointegration and vector error correction (VECM) framework, empirical tests indicate the presence of a unique cointegrating vector linking real exports, real foreign income, relative export prices and real exchange rate volatility in the long run. Furthermore, the results show that increases in the volatility of the real exchange rate raise uncertainty about profits to be made which exert significant negative effects on exports both in the short- and long-run. Our results also show that improvements in the terms of trade (represented by declines in the real exchange rate) and real foreign income exert positive effects on export activity. Most importantly, we found that the trade liberalization and economic reform policies implemented in the post-1986 structural adjustment period contributed to Nigeria's export performance. Overall, our findings suggest that Nigeria's exporting activities can be further boosted by policies aimed at achieving and maintaining a stable competitive real exchange rate.     

Imports and exports in 50 countries: Tests of cointegration and structural breaks

This paper provides new evidence on the long-run convergence between imports and exports in 50 countries over the quarterly period 1973:2 to 1998:1. Cointegration analyses are based on the Johansen [Johansen, S. (1995). Likelihood-based inference in cointegrating vector autoregressive models. New York: Oxford University Press.] and the Stock and Watson [J. Am. Stat. Assoc. 83 (1988) 1097.] system approaches. Evidence of stability of the cointegration space is examined using the SupF test developed by Hansen [J. Bus. Econ. Stat. 10 (1992) 321]. Based on the Johansen technique, we find evidence in favor of cointegration in 35 of the 50 countries. In addition, cointegration is confirmed for all countries (except Mexico) using the Stock and Watson test. This finding indicates that macroeconomic policies have been effective in the long-run and suggests that these countries are largely not in violation of their international budget constraint. We find evidence that in most of the countries where the slope coefficient on the export variable is positive, the cointegrating coefficient is also unity. The cointegration space appears stable for most of the countries. Nonetheless, the results suggest that countries in the regions of the Middle East, Latin America, and Europe have cointegrating relations that are more unstable than those in other regions.     

Exchange-rate volatility and export performance: Do emerging market economies resemble industrial countries or other developing countries?

Authors who do not distinguish between Emerging Market Economies (EMEs) and other developing countries, find evidence of negative and significant effects of exchange-rate volatility on trade. We investigate the effects of real exchange-rate volatility on exports of ten EMEs and eleven other developing countries that were not classified as EMEs over our estimation period. We use panel-data sets that cover the periods 1980:Q1–2006:Q4 for the EMEs and 1980:Q1–2005:Q4 for the other developing countries. We use two estimation methods — generalized method of moments (GMM) estimation and time-varying-coefficient (TVC) estimation. The TVC procedure removes specification biases from the coefficients, revealing the underlying stable parameters of interest. We obtain similar results as previous authors for only the eleven non-EME developing countries we consider. In contrast, our results for the EMEs do not show a negative and significant effect of exchange-rate volatility on the exports of the countries considered. Our findings suggest that the open capital markets of EMEs may have reduced the effects of exchange-rate fluctuations on exports compared with those effects in the cases of other developing countries.     

Exchange-rate variability and U.S.-French trade flows: evidence from industry data

Recent studies have greatly expanded the literature on the effects of exchange-rate volatility on industry-level bilateral trade flows. In this study, we examine the case of the United States and France, applying cointegration analysis to a set of 146 U.S. export and 115 U.S. import industries. We find that the majority of industries show little or no relationship between risk and trade volumes, but that small industries—particularly for exports—show more sensitivity than do large ones. A disproportionate share of industries respond positively to increased volatility, particularly among U.S. importers, suggesting the presence of “risk loving” behavior.     

Impact of exchange rate uncertainty on commodity trade between US and Sweden

Previous studies that investigated the effects of exchange rate uncertainty on the trade flows of Sweden employed aggregate trade data either between Sweden and the rest of the world or at bilateral level between Sweden and her major trading partners. In this article, we disaggregate the trade data and employ the import and export data from 87 industries that trade between Sweden and the US. We find that exchange rate volatility has significant short-run effects on the trade flows between the two countries in almost two-third of the industries. However, the short-run effects are translated into the long-run effects in one-third of the cases. Furthermore, the real depreciation of krona against the dollar was found to have favourable effects on the overall trade balance between the two countries.     

Trade openness reduces growth volatility when countries are well diversified

This paper addresses the mechanisms by which trade openness affects growth volatility. Using a diverse set of export concentration measures, we present strong evidence pointing to an important role for export diversification in conditioning the effect of trade openness on growth volatility. Indeed, the effect of openness on volatility is shown to be negative for a significant proportion of countries with relatively diversified export baskets.     

Does exchange-rate uncertainty matter in the Malaysia–E.U. bilateral trade? An industry level investigation

Due to ambiguity in the past literature, researchers have examined exchange rate volatility effect on trade using disaggregated data in recent years. Previous research has focused more on aggregated data having aggregation bias which has led to unnecessarily over-generalized findings. This study investigates the impact of exchange rate volatility on the Malaysian bilateral trade flows with European Union using industry level data. Our empirical findings, based on auto-regressive distributed lag framework, suggest that many import and export industries experience exchange rate volatility influence in the short run, while a very small number of industries show this effect in the long run. Moreover, the adverse impact of financial crisis (2007–2008) is more prevalent on import industries compared to export industries.     

IMPACT OF EXCHANGE RATE UNCERTAINTY ON COMMODITY TRADE BETWEEN THE US AND AUSTRALIA*

Exchange rate volatility is said to have negative or positive effect on trade flows. Previous studies that considered the impact of exchange rate uncertainty on the trade flows of Australia employed trade data either between Australia and rest of the world or between Australia and her few major trading partners. They were unable to discover any significant impact. In this paper when we disaggregate trade data by commodity between Australia and one of her major trading partners, the US, we find exchange rate volatility to have short‐run effects on trade flows of most industries. However, the short‐run effects last into long run, only in limited cases, though more in export commodities than import ones.     

Testing the Saving-Investment correlations in India: An evidence from single-equation and system estimators

This study tests the Saving-Investment correlations in India using both single-equation and system estimators. All the estimators suggest the cointegrating relationship between saving and investment, and the results are robust to the choice of estimator. The conventional and new CUSUM tests show long-run stability of equilibrium residuals and reinforce the cointegrating relationship between the model series. The slope parameter on saving is significantly different from zero, but not from one. These results support the FH hypothesis and suggest the imperfect mobility of capital and home-bias in the asset portfolio of domestic investors. The heavy reliance of investment on domestic saving also reinforces the ‘Lucas Puzzle’ on the lack of capital flows from the developed countries to the developing countries with scare capital and higher marginal product of capital.     

Inflation,openness, and exchange-rate regimes: The quest for short-term commitment

This paper further tests Romer's [Romer, D., 1993. Openness and inflation: theory and evidence. Quarterly Journal of Economics 58, 869–903] extension of Kydland and Prescott's [Kydland, F., Prescott, E., 1977. Rules rather than discretion: the inconsistency of optimal plans. Journal of Political Economy 85, 473–491] predictions for dynamic inconsistency problems in open economies. In a panel data set of developed and developing countries from 1973 to 1998, I find that openness does not play a role in restricting inflation in the short run. On the other hand, a fixed exchange-rate regime plays a significant role. The results are robust to controlling for other variables that determine inflation, performing sensitivity analysis, and using a de facto exchange-rate regime classification.     

On the asymmetric effects of exchange rate volatility on trade flows: New evidence from US-Malaysia trade at the industry level

All previous studies that assessed the impact of exchange rate volatility on trade flows assumed that the effects are symmetric. In this paper, we open a new path in the literature by arguing that indeed the effects of exchange rate volatility on trade flows could be asymmetric. The asymmetric effects are mostly due to the change in expectations of traders when a currency depreciates as compared to a case when that currency appreciates. We demonstrate the asymmetric effects by using monthly data from 54 Malaysian industries that export to the U.S. and from 63 Malaysian industries that import from the U.S. The application of the nonlinear Autoregressive Distributed Lag (ARDL) approach of Shin et al. (2014) supports short-run as well as long-run asymmetric effects in almost 1/3rd of the industries. The approach identifies industries that are affected when volatility increases versus those that are affected when volatility declines.     

Power laws in EU country exports

International trade flows are highly concentrated in the top units of analysis. In this paper, we study the size distribution of exports at the product level, using Comext data for the 28 EU countries over the period 2002–2014. We fit power law relationships running log rank–log size regressions. The estimated Pareto exponent may be interpreted as a single measure of the inequality between the top products; it thus constitutes an alternative to other measures of export diversification. The Pareto exponent estimates are quite stable for most EU countries between 2002 and 2014. However, some countries stand out for their increase or decrease in the Pareto exponent. Some preliminary evidence suggesting negative correlation between volatility in EU country exports and export diversification at the product level is also provided.     

Low-wage import competition and populist backlash: The case of Italy

This paper studies empirically the role of trade globalization in shifting the electoral base towards populism. We proxy the trade shock with swiftly rising import competition from China and compare voting patterns at the national parliamentary elections from 1992 to 2013 in about 8000 Italian municipalities differently exposed to the trade shock. We instrument import competition from China with Chinese export flows to other high-income countries and estimate the model in first differences. Our results indicate that trade globalization increases support for populist parties, as well as invalid votes and abstentionism. To rationalize these findings, we offer evidence that import competition worsens local labor market conditions – higher unemployment, lower income and durable consumption – and increases inequality. Finally, we point out that local public expenditure may play a role in mitigating the political consequences of the trade shock, arguably because it alleviates economic distress.     

Does black market exchange rate volatility deter the trade flows? Iranian experience

Previous studies that investigated the impact of exchange rate volatility on the trade flows, employed official exchange rate data to construct a measure of exchange rate uncertainty. In this paper we show that in countries that there is a black market for foreign exchange, the black market exchange rate volatility could have adverse effect on the trade flows. We show this by using data from Iran and cointegration analysis.     

Exchange rate volatility and US commodity trade with the rest of the world

Exchange rate volatility is argued to affect the trade flows negatively and positively. Indeed, empirical studies that have addressed the issue have supported both effects. These studies have used aggregate trade flows data either between one country and the rest of the world or between two countries at the bilateral level. Studies that have disaggregated trade data by industry are rare. Thus, we extend the literature by looking at the experiences of 66 American industries that trade with the rest of the world using monthly data. In most cases, trade flows are not affected by GARCH‐based volatility of the real effective exchange rate of the dollar.     

Exchange rate volatility and capital inflows: role of financial development

There is vast literature examining the impact of exchange rate volatility on various macroeconomic aggregates such as economic growth, trade flows, domestic investment, and more recently capital flows. However, these studies have ignored the role of financial development while examining the impact of exchange rate volatility on capital flows. This study aims to analyze the impact of exchange rate volatility on capital inflows towards developing countries by incorporating the role of financial development over the time period 1980–2013. In this regard, the behavior of two types of capital flows is examined: physical capital inflows measured as foreign direct investment, and financial inflows quantified through remittance inflows. The empirical investigation comprises the direct as well as indirect effect of exchange rate volatility on capital inflows. The study employs dynamic system GMM estimation technique to empirically estimate the effect of exchange rate volatility on capital inflows. The empirical results of the study identify that exchange rate volatility dampens both physical and financial inflows towards developing countries. The indirect impact of exchange rate volatility through financial development, however, turns out positive and statistically significant. This finding reflects that financial development helps in reducing the harmful impact of exchange rate volatility on capital inflows. Hence, the study concludes that a developed financial system is an important channel through which developing countries may improve capital inflows in the long run.     

The impact of exchange rate volatility on commodity trade between the US and Thailand

The impact of exchange rate volatility on trade flows continues to occupy the international finance literature. More recent studies have deviated from the traditional approach of using aggregate trade flows and have employed trade data at commodity level. This study investigates the impact of exchange rate uncertainty on the trade flows of 118 US exporting industries to Thailand and 41 US importing industries from Thailand. We find that exchange rate uncertainty has short-run effects on the trade flows of most industries. In the long-run, the main determinants of the trade flows are the level of economic activity in both countries.     

The effects of currency fluctuations and trade integration on industry trade between Canada and Mexico

Since studies of North American trade flows tend to focus on the United States as the main trading partner, trade between Canada and Mexico has received relatively little attention. Here, we examine bilateral trade flows for 62 Canadian export industries to Mexico and 45 import industries from Mexico to assess the effects of currency fluctuations and trade integration on these individual trade flows. We find that Mexico’s largest export industries respond to depreciation more than Canada’s largest export industries do. Both countries’ trade flows are influenced even more by trade integration. Since there is evidence of strong intra-industry trade between these two countries, we can attribute this effect to the exploitation of economies of scale.