Abstract
This paper analyzes the effects of real exchange rate volatility on the United States’ exports to BRICS. It focuses on the top 20 export products (defined by the 2-digit Harmonized System codes) from the United States to Brazil, Russia, India, China, and South Africa, and uses quarterly data for period from 1993Q1 to 2021Q2. The specified panel regression model was first estimated using three estimation methods, namely, the Panel Least Squares, the Panel Fully Modified Least Squares (FMOLS), and Panel Dynamic Least Squares (DOLS). In addition, to estimate the short-run and long-run effects of real exchange rate volatility on exports, it also uses the method of the Autoregressive Distributed Lag (ARDL) approach to cointegration analysis and error-correction models. Two measures of exchange rate volatility are used in this study. According to our findings, the levels of foreign economic activity have a positive effect on exports while the real exchange rate has a negative effect on exports. In addition, exchange rate volatility has a negative effect on exports in the long run in all five countries. However, the effects of exchange volatility are found to yield mixed results in the short run regardless of which measure of exchange rate volatility was used.
Highlights
Much theoretical and empirical research has been conducted to examine the effects of exchange rate volatility on international trade flows
The results found that trade flows of many countries are affected by exchange rate volatility in the short term, but only a few countries are affected in the long term in both imports and exports
We used a multivariate error-correction model to investigate the dynamic link between exports and exchange rate volatility in BRICS nations
Summary
Much theoretical and empirical research has been conducted to examine the effects of exchange rate volatility on international trade flows. One of the reasons for the negative relationship between exchange rate volatility and trade flows is that real exchange rate volatility may affect exports directly through uncertainty and adjustment costs for risk-averse exporting investors. Another reason for the negative relationship is that exchange rate volatility may have an indirect effect through its impact on output structure, investment, and government policy. Exchange rate volatility and trade flows have been found to have a positive relationship in some studies, while a few other studies have found an insignificantly negative association between the two variables. A positive association between the two variables has been attributed to exchange rate volatility making exporting more appealing to risk-tolerant exporting firms
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