Exchange Rate Volatility, Earnings Uncertainty and Bidirectional Trade Flows: Empirical Evidence on Ghana

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ABSTRACTAlthough the empirical findings on the impact of exchange rate volatility on trade is diverse, the growing consensus in the literature appears to suggest that for developing economies, the theoretically expected negative relationship almost always exists. The paper takes a different approach to empirically assess this relationship by analysing the impact of exchange rate volatility independently on total trade, imports and exports. The intuition behind this approach is to assess exactly how exporters and importers are incentivised (differently or similarly) by exchange rate volatility costs. Whereas adequately risk-aversed Ghanaian exporters in the presence of higher exchange rate volatility and the absence of hedging facilities effectively compensated against exchange rate risk by increasing volume of exports, import decisions were to some extent (although not effectively) negatively affected by exchange rate volatility. The different responses by Ghanaian exporters and importers to higher exchange rate volatility costs are reflected in the relationship between volatility and total trade. The useful policy lessons and the challenges that the empirical evidence present are discussed.