Exchange Rate Depreciation, Risk and Exports: A Counterfactual VAR Approach

Abstract

This chapter quantifies the net effects of the real exchange rate depreciation after excluding the effects of the exchange rate risk and shows these differ according to certain assumptions. The analysis differentiates the effects when risk is expected, unexpected and the additional effects due to exports risk. Evidence shows that the percentage reduction in the cumulative exchange rate depreciation effects on exports growth vary according to whether risk is aggregated, permanent and transitory. Evidence shows that the exchange rate risk matters for the transmission of positive US economic policy uncertainty shocks to South African exports growth to the US. Furthermore, the interaction between the exchange rate depreciation and risk shows that the stimulatory depreciation effects are reduced much more in the presence of elevated exchange rate and exports risk. In addition, evidence shows that permanent exchange rate risk worsens the decline in exports following the US economic policy uncertainty shocks compared to transitory exchange rate risk.