The effects of exchange rate uncertainty on exports |
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Authors: | Sajjadur Rahman Apostolos Serletis |
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Institution: | aDepartment of Economics, University of Calgary, 2500 University Drive NW, Calgary, Alberta, Canada T2N 1N4 |
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Abstract: | We investigate the effects of exchange rate uncertainty on exports in the context of a multivariate framework in which a structural open economy vector autoregression is modified to accommodate multivariate GARCH-in-Mean errors, as detailed in Elder (Elder, J., 2004. Another perspective on the effects of inflation uncertainty. Journal of Money, Credit, and Banking 36, 912–928). Our measure of exchange rate uncertainty is the conditional standard deviation of the forecast error of the change in the exchange rate. We isolate the effects of exchange rate uncertainty on exports and also analyze how accounting for exchange rate uncertainty affects the response of exports to exchange rate shocks. We estimate the model using aggregate monthly data for the United States, over the flexible exchange rate period (since 1973). We use full information maximum likelihood estimation procedures and find that exchange rate uncertainty has a negative and significant effect on US exports. We also find that accounting for exchange rate uncertainty tends to strengthen the dynamic response of exports to shocks in the exchange rate and that exports respond asymmetrically to positive and negative exchange rate shocks of equal magnitude. |
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Keywords: | Exchange rate volatility VAR Multivariate GARCH-in-Mean model |
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