Asymmetrical Real Exchange Rate Risk Effects on South African and US Exports Growth

Abstract

This chapter shows that the real exchange rate depreciation shocks have a positive effect of increasing exports consistent with theoretical predictions. However, the negative impact of the exchange rate risk tends to partially or completely offset these positive effects thus can ultimately even ultimately reduce exports. Evidence indicates that real exchange depreciation shocks have a greater effect on future real exchange rate volatility than the real exchange rate appreciation shocks of the same magnitude. We investigated the asymmetric exchange rate volatility effects on exports during appreciations and depreciations. We did not find strong support for the asymmetry exchange rate risk hypothesis. But the results under asymmetric models suggest that exporters are sensitive to appreciations compared to depreciations. The results show that the exchange rate risk reduces the impact of the exchange rate depreciation on exports growth by an estimated 34 percent. However, this is a smaller offsetting impact which neutralises the stimulating effects of the exchange rate on exports growth compared to when this risk impact is modelled to depend on exchange rate appreciation state. The policy implication is that the exchange rate risk effects seem to be larger in the presence of exchange rate appreciations. Moreover, there is no evidence to support the asymmetric hedging behaviour hypothesis consistent with the alternative explanation that exporters respond more to appreciations than to depreciations.