The impact of real exchange rate on international trade: Evidence from panel structural VAR model

Abstract

This paper investigates the importance of real exchange rates on export volumes by estimating a panel SVAR model using quarterly unbalanced panel data from 21 emerging markets over the 2005:Q1-2018:Q4 period. Although the results suggest no conclusive evidence that real exchange rate shocks do affect the export volumes in our sample of emerging markets, the responses of export volume to real exchange rate shocks are heterogeneous across countries in which commodity exporter countries, on average, have a lower response of exports to the real exchange rate movements. Furthermore, we find that while the magnitude of response of the export volumes to exchange rate shocks is positively related to exchange rate volatility, the higher export market penetration ratio helps insulate the economy from real exchange rate shocks. Overall, our results carry broad policy implications indicating that policymakers need to pay attention to the exchange rate volatility of their countries and expand their export competition in the world trade.