Abstract
Real exchange rate volatility on exports is an important topic in international trade and finance. However, litter studies analyzed whether the effect of real exchange rate volatility on export will change overtime. This paper categorizes the countries into two groups, namely the developed countries and export oriented less developed countries (LDCs), and divided the whole time period into two sub-periods, i.e. 1994 to 2007 and 2008 to 2014, in order to study whether the effects of volatility on exports to U.S. were different for countries with different economic characteristics and whether it changed over time. At the end, this paper discovered that the real exchange rate volatility had a bigger impact on developed countries than export-oriented LDCs, and the impact had increased in the later period. The weaker flexibility in distribution network of firms also explained why export-oriented LDCs’ exports are less sensitive to real exchange rate volatility.
Highlights
1.1 The Effect of Volatility on ExportsWhether real exchange rate volatility affects exports is an essential topic in international finance and international trade
Majority of literatures discovered that real exchange rate volatility has a negative relationship with exports, while this negative relationship is stronger for developing countries than for developed countries (Sauer & Bohara, 2001; Grier & Smallwood, 2007)
This paper discovers that the RER volatility had a significant and negative impact on real exports from developed countries in both periods
Summary
Whether real exchange rate volatility affects exports is an essential topic in international finance and international trade. If international traders are risk averse, and exchange rate volatility is costly, they should reduce the value of international trade flow in order to lower the risk exposure. This negative relationship between the real or nominal exchange rate volatility and exports is support by literature (e.g., Arize, 1995; Holly, 1995; Oskooee & Hegerty, 2009; Nishimura & Hirayama, 2013). Arize (1997) showed that even highly developed countries, i.e. all of the G-7, nominal exchange rate volatility could still lower the real exports. The relationship between real exchange rate volatility and exports values is studied. This study analyzes this impact on two different groups, namely the developed countries and export-oriented LDCs
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