Short- and Long-Run Effects of Forex Volatility on International Trade– A Case of Middle Eastern Country

Abstract

This research was aimed at understanding the effects of exchange rate volatility on UAE’s international trade. To examine the effects, 10 of the top trading partners of UAE were considered for this study. Additionally, in order to determine the volatilities of UAE’s top 10 trading partners’ currencies, the GARCH (1,1) model was used. After that the Autoregressive Distributed Lag (ARDL) bound testing approach determined the long-run relationship between the volatilities of the currencies and the trade of UAE. Furthermore, the short-run relation between volatility and trade was detected using the Granger causality test. The results indicated that in the long run the volatility of the Chinese Renminbi, the Euro and the Saudi Riyal affect UAE’s exports, while UAE’s imports in the long run are affected by the volatility of the Iranian Rial and the Euro as well. On the other hand, the volatilities of the Indian Rupee and the Omani Riyal tend to affect UAE’s exports in the short term, however, the imports of UAE in the short run are actually affected by the volatilities of the Euro and the Swiss Franc.