Effects Of Exchange Rate Variability Research Articles

Exchange Rate Misalignments and International Trade Policy: Impacts on Tariffs

The debate on “exchange wars and trade wars” is raising the attention of experts on international trade and economics. The main purpose of this paper is to analyze the impacts of exchange rate misalignments on one of the most traditional trade policy instruments – tariffs, as defined by the WTO – World Trade Organization. It is divided into three sections: the first one examines the effects of exchange rate variations on tariffs and its consequences for the multilateral trade system; the second explains the methodology used to determine exchange rate misalignments and also presents its results for Brazil, US and China; and the third summarizes the methodology applied to calculate the impacts of exchange rate misalignments on the level of tariff protection through an exercise of “misalignment tariffication.

Evaluation of Effect of Exchange Rate Variability on Export of Ethiopia’s Agricultural Product: Case of Oilseeds

This research was carried out to find out the effect of exchange rate variability on export of oilseeds. It has employed annual time series data (1992-2010) collected from the country’s different institutions, namely: National Bank of Ethiopia (NBE), Central Statistical Agency of Ethiopia (CSA), and Ethiopian Custom Authority (ECA). Tools of descriptive statistics were used to analyze the data and understand the dynamics of the variables included in the analysis. Autoregressive Distributive Lag (ARDL) with Wald test was used to test the hypothesis that ‘there is no short run and long run relationship between export oilseeds and explanatory variables included in the model’. The result revealed that export oilseeds have negative relationship with exchange rate variability. Terms of Trade (TOT) was found to be negative and significant. Gross Domestic Product (GDP) is found to be insignificant; implying contribution of oilseeds to the export basket of the country is decreasing. Moreover, the underlined hypothesis was rejected confirming that there is a long run relationship between export and oilseeds and explanatory variables included. Export diversification and value addition are of possible solutions the country should focus on to improve the ever decreasing terms of trade and extract the gain from policy changes. Key Words: Exchange rate variability, Devaluation, Export, Oilseeds, ARDL and Wald test

Asymmetric Exchange Rate Pass-Through: Evidence from Major Countries

The aim of this paper is to investigate the asymmetric effect of exchange rate variations on prices over the short- and long-run. To this end, we estimate a mark-up model for prices using a novel and simple asymmetric cointegrating model, with positive and negative partial sum decomposition of the nominal exchange rates. Our results show that prices react differently to appreciations and depreciations over the long-run, an effect that was previously ignored in the literature. In particular, we provide evidence that depreciations are passed through prices more than appreciations, a result that might suggest weak competition structures. This result has important implications for the proper conduct of monetary policy.

Supply-side effects of exchange rates, exchange rate expectations and induced currency depreciation

Within the context of a small open economy model, this paper examines the repercussions of induced currency depreciation. The results presented in this paper are based on a model with firm microeconomic foundations and which takes into account both the supply and demand-side effects of exchange rate variations. The distinguishing feature of the model is the role of exchange rate expectations. We consider three kinds of expectations; adaptive, extrapolative, and regressive expectations. We also perform several sensitivity tests based on these expectations. Our simulation exercise shows that the effect of induced currency depreciation depends largely on supply-side effects. In most cases, we find that currency depreciation results in (i) a fall in output, (ii) an increase in prices and (iii) an improvement in the balance of trade. In the absence of weak supply-side effects of exchange rates, we find that, if the Marshall–Lerner conditions hold, then depreciation of the home currency has a favorable effect on output but its effect on the balance of trade is negative.

Exchange rate variability and the export demand for Malaysia's semiconductors: an empirical study

This article examines the effects of exchange rate variability on export demand for semiconductors, which is the largest sub-sector of electronics industry in Malaysia as reported by Malaysian Industrial Development Authority (MIDA, 2004). The empirical results, which are estimated based on the Johansen's multivariate cointegration tests and error-correction model, suggest that there is a unique long-run relationship among quantities of export, relative price, real foreign income and real exchange rate variability. The major finding of this article is that the variability of real exchange rate has some effect on semiconductor exports in both the long run and the short run. In the light of rapid advances in technology in the global markets for electronics products, the findings are useful to policy makers for the design and target of appropriate exchange rate and industrial policies to enhance the export competitiveness of semiconductor industry.

Supply-Side Effects of Exchange Rate, Exchange Rate Expectations and Induced Currency Depreciation

This paper examines the repercussions of induced currency depreciation in a small open economy. The results presented in this paper are based on a model which has firmer microeconomics foundation and that takes into account both the supply side and demand side effects of exchange rate variations. The distinguishing feature of our model is the role of exchange rate expectations. We have considered three kinds of expectations; adaptive expectations, extrapolative, and regressive expectations and have performed several sensitivity tests based on these expectations. Our simulation exercise shows that the effect of induced currency depreciation depends largely on the supply-side effects of the exchange rate. In most cases, we found that currency depreciation results in fall in output, an increase in prices and an improvement in balance of trade. In the absence or weak supply-side effects of exchange rate, we learn that if Marshall-Lerner conditions holds then depreciation of the home currency would have favorable effects on output but has adverse effects on balance of trade.

The effects of exchange rate variability on international trade: a meta-regression analysis

The trade effects of exchange rate variability have been an issue in international economics for the past 30 years. The contribution of this article is to apply meta-regression analysis (MRA) to the empirical literature. On average, exchange rate variability exerts a negative effect on international trade. Yet MRA confirms the view that this result is highly conditional, by identifying factors that help to explain why estimated trade effects vary from significantly negative to significantly positive. MRA evidence on the pronounced heterogeneity of the empirical findings may be instructive for policy: first, by establishing that average trade effects are not sufficiently robust to generalize across countries; and second, by suggesting the importance of hedging opportunities – hence of financial development – for trade promotion. For the practice of MRA, we make a case for checking the robustness of results with respect to estimation technique, model specification and sample.

The Impact of Exchange Rate Volatility on Sectoral Exports: (1973–2004)

This paper looks at the impact of exchange rate volatility on real sectoral exports for Austria, Denmark, France, Ireland, Italy, Greece, Portugal, U.K., Finland, Netherlands, and Sweden for 1973–2004. Since we have not been able to identify any aggregate effects in previous empirical work in this study we examine sectoral exports of leather and rubber using the standard deviation of the moving average of the log of real exchange rate as a measure of exchange rate volatility. Overall, our results suggest that exchange rate volatility has a mixed effect on sectoral exports for the EU countries. With the move from fixed to flexible exchange rates in Europe in 1973, there was increasing concern about effects of exchange rate variability on trade. Economic theory is ambiguous on the impacts of increased exchange rate variation as some models can predict negative or positive impacts depending on key parameters. Empirical work in this field was pioneered by Arize in various papers (Arize, 1995, North American Journal of Economics and Finance; Arize, 1996, International Review of Economics and Finance; Arize, 1999, The International Trade Journal; Arize, Osang And Slottje, 2000, Journal of Business and Economic Statistics). The body of literature favours the conclusion that the relationship is negative and statistically significant, although there are still significant positive as well as insignificant results. In any case, there is little, if not at all, examination of sectoral effects of exchange rate volatility to exports for samples containing EU countries. Having in the past examined aggregate effects on EU countries (Serenis, Cameron, Serenis, 2008 Atlantic Economic Journal; Serenis, 2006, PhD. thesis), our analysis will now turn to sectoral effects from volatility to export quantity since Atl Econ J (2010) 38:117–118 DOI 10.1007/s11293-009-9207-5

The effect of exchange rate variability on US shareholder wealth

We examine the relationship between financial crisis exchange rate variability and equity return volatility for US multinationals. Empirical analysis of the major financial crises of the last decades reveals that stock return variability increases significantly in the aftermath of a crisis, even relative to the increase in stock return volatility for other firms belonging to the same industry and market capitalization class. In conjunction with this increase in total volatility, there is also an increase in stock market risk ( β) for multinational firms. Moreover, trade and service oriented industries appear to be particularly sensitive to these changing exchange rate conditions.

A Brand Specific Investigation of International Cost Shock Threats on Price and Margin with a Manufacturer-Wholesaler-Retailer Model

In times of increasing oil prices and a weak dollar, European companies that focus their business on the US market may find themselves in a weak position. While many businesses can hedge this kind of risk by relocating production to the US, or employing financial remedies, these strategies may not work throughout the consumer goods industry. Especially for brands whose consumption is strongly impacted by country of origin (e.g. French whine, Swiss chocolate, German beer, etc.), there are only limited possibilities to bypass these challenges. To react efficiently to these threats, managers need a precise picture of complete market mechanisms before they can set up an appropriate marketing strategy to react. We aim to enhance the understanding of market mechanisms that are caused by exogenous cost shocks for typical consumer goods. The contribution of our work is twofold: To investigate the underlying process and to derive concrete managerial suggestions. We hereby propose a combination of two different empirical frameworks to measure the effects of exchange rate variations in fast moving consumer markets. Furthermore we extend existing work in being the first to model vertical interactions with a Manufacturer-Wholesaler-Retailer Model. Within this framework we investigate how changes in local currency affect the strategic management variables of price, margin and profit in a typical consumer goods market. While it is widely known that exchange rate changes cause variations in export/import prices and numerous studies show that the effect of currency fluctuations decreases within the distribution process, recent marketing research in this area has not explicitly accounted for the mechanisms that occur within the distribution channel. Many empirical studies implicate that exogenous cost shocks, which are caused by exchange rate changes, are passed through imperfectly to final consumer prices. We therefore show that the margins of the players involved in the distribution process will be affected differently by exchange rate variation dependent on the competitive situation. Although our empirical study focuses on the effect of exchange rate variations on strategic marketing variables of a selected fast moving consumer good, our framework can be easily adapted to any other market and other sources that cause a change in production cost.

The effects of exchange rate variability on Malaysia's disaggregated electrical exports

PurposeThis paper aims to examine the influence of exchange rate variability on the demand for Malaysia's top five electrical exports as classified by Standard International Trade Classification (SITC) product groups.Design/methodology/approachThe autoregressive distributed lag (ARDL) modelling approach to co‐integration is employed in order to estimate the influence of exchange rate variability on export demand.FindingsThe empirical results indicate that foreign income and prices are important determinants of export demand for all of the five electrical exports, in both the long run and the short run, over the sample period 1990‐2001. More interestingly, this paper supports the view that exchange rate variability has an adverse effect on Malaysia's electrical exports.Research limitations/implicationsOne limitation of the study is the appropriateness of the ARDL modelling approach to examine the influence of exchange rate variability (which is stationary, I(0)) on trade behaviour such as export demand behaviour.Practical implicationsThis paper is important to policymakers for the design of both exchange rate and trade policies in order to promote export growth, which could lead to Malaysia's transition towards high‐technology industrialisation.Originality/valueThis paper examines the influence of exchange rate variability on the demand for Malaysia's top five electrical exports as classified by SITC product groups, information which is not available in the existing literature.

Exchange Rates and Exports: Evidence from Manufacturing Firms in the UK

The thesis examines the effect of exchange rate variability on firms' export decisions, using data for UK manufacturing firms. We separately investigate the relationship between the changes of level of exchange rate and exports and that between exchange rate uncertainty and exports. Our results show that export extensive margin is not significantly related to changes in the level of exchange rates, whereas exchange rates have a significant and negative impact on the export intensity. Since industry heterogeneity is important in the effect of exchange rate level changes, we further explore possible explanations. In particular, we test whether external orientation and market structure play a role in the effect. Our results provide significant evidence for the role of external orientation and market structure. We also find significant evidence for the hysteresis effect of exchange rate uncertainty on exports, using new measures of uncertainty. In both cases, the behaviour of multinationals is investigated. We find that multinationals are less likely to be negatively affected by both changes of level of exchange rate and exchange rate uncertainty than indigenous firms. It contributes to the micro econometric literature in several aspects. Our evidence for industry heterogeneity from UK firm level data is new. Our explanations for industry heterogeneity by testing two hypotheses are the first attempt to investigate the factors driving different effects across industries. New measures of exchange rate uncertainty and related new method are used to test the hypothesis of hysteresis effects of uncertainty on trade. The use of micro data and new measures enable us to overcome the econometric difficulties and problems in previous studies. We also investigate whether multinationals' export behaviour is different from that of indigenous firms in response to exchange rate fluctuations. As far as we know, the multinationals' ability to deal with currency risk has never been examined before. The thesis provides new evidence for the multinationals' advantage of internalising currency risk over indigenous firms under exchange rate movements.

Incomplete pass-through and the welfare effects of exchange rate variability

This paper considers the implications of incomplete exchange rate pass-through for optimal monetary and exchange rate policy. A two-country model is presented, which allows an explicit derivation of welfare functions in terms of a weighted sum of the second moments of producer prices and the nominal exchange rate. From a single country perspective, the optimal exchange rate variance depends on the degree of pass-through, the size and openness of the economy, the elasticity of labour supply and the volatility of foreign producer prices. Welfare may be decreasing or increasing in the volatility of the exchange rate.

Exchange rate volatility, sectoral trade, and the aggregation bias

This paper proposes a sectoral theoretical model in an imperfect competition framework, with country-specific and industry-specific original variables, notably factor productivity, scale economies, or product differentiation. It is then empirically estimated in a panel data model, at a sectoral and geographical disaggregation level, to test the impact of exchange rate volatility on G-7 countries' exports. Economies of scale are estimated from a non-linear translog production system. Two exchange rate volatility measurements have been used: the moving sample standard deviation and the GARCH approach. The main finding shows that the impact of exchange rate volatility on exports varies considerably, depending on the industry covered and the export destination markets. As a consequence, there is both a sectoral and geographical aggregation bias when estimating the effects of exchange rate variations. JEL no. F1, F12, F14

Exchange rates and firms' liquidity: evidence from ADRs

Exchange rate changes can, in principle, affect a firm's value by affecting the firm's earnings or its cost of funds. Existing studies using monthly data over long sample periods find little or no impact of changes in exchange rates on a firm's valuation. We examine a different potential path for exchange rate effects, namely the effect of exchange rate variability on a stock's liquidity. Using transactions data, we examine the microstructure characteristics of United Kingdom and Mexican American Depositary Receipts (ADRs) around two major exchange rate crises — the pound sterling withdrawal from the European Exchange Rate Mechanism in September 1992 and the Mexican devaluation of December 1994. We conclude that these events of exchange rate turbulence had little or no effect on the trading costs of ADRs in the United States. The results suggest that the impact of exchange rate volatility on market liquidity is not a conduit by which stock values are affected.

Exchange Rate Shocks and the Speed of Trade Price Adjustment

1. Introduction Theoretical and empirical work in the international trade literature dealing with the relationship between exchange rate and trade prices has been dominated and guided by the static pass-through and profit markup model' (see, e.g., Feinberg 1986; Mann 1986; Fisher 1989; Hooper and Mann 1989; Knetter 1989; Gagnon and Knetter 1995; Feenstra, Gagnon, and Knetter 1996; and Lee 1997). The shortcoming of such models is well captured by William Branson (1989, p. 333): Difference in adjustment response signals to me the need for a reconsideration of the theoretical framework for the analysis of the pass-through question. By now, we should be thinking about optimizing price policy for investors and exporters who know that they face an exchange rate that follows some sort of stochastic process over time. These differences call for a revision of pass-through theory along the lines of time series analysis. Our explicit incorporation of profit-maximizing firms facing adjustment costs develops the model introduced by Krugman ( 1987). It transforms the traditional markup and pass-through model to explain from first principles a dynamic markup and a price adjustment speed, both depending on fundamental characteristics of the firms involved. Krugman (1989) concludes his paper on pricing to market by calling for further research on the adjustment cost model. Regarding the adjustment cost approach, he states (Krugman 1989, p. 44), It is still a speculative idea, not grounded in solid empirical tests; but it is a good story, and if it is correct, it has extremely important implications for economic policy. The present paper provides the quantity adjustment cost approach that Krugman calls for. As such, it complements the work of Gagnon (1989) and Kasa (1992). While Gagnon and Kasa employ quantity adjustment cost models with many of the same features as the model developed here, they provide only approximate solutions and focus on a quite different set of issues. Gagnon examines the effect of exchange rate variability on trade volume. Kasa investigates the importance of mean reversion in exchange rates as an explanation for the pricing to market hypothesis. In contrast, our focus is on the relation between adjustment speeds and pass-through. Thus, our contribution relative to Gagnon (1989) and Kasa (1992) is that we provide the passthrough issue in a dynamic context with exact analytical solutions that relate the degree of passthrough to adjustment speeds and identify the determinants of commodity-specific adjustment speeds in response to exchange rate shocks. The remainder of the paper is organized as follows. In section 2 we develop a partial equilibrium model, taking exchange rates as given, of the pricing policies of a profit-maximizing firm competing in foreign markets and subject to a convex quantity adjustment cost. Section 3 develops testable implications directly from the model. Section 4 discusses the data and empirical methodology for preliminary two-stage time-series and cross-sectional tests. Section 5 provides the tentative estimation, and section 6 concludes. 2. A Simple Partial Equilibrium Model Consider a representative firm producing fox export that maximizes the expected discounted value of infinite horizon real profits. The firm generates its revenue abroad in foreign currency. It has no influence on the exchange rate, may adjust its price at any point in time, but is subject to a convex cost of quantity adjustment. The firm maximizes where x is the exogenously given real exchange rate at time t. We define x as the units of domestic currency per unit of foreign currency multiplied by the export destination country's price index and divided by the home country's price index. Instantaneous profits are discounted at a rate r, which is specific to the firm; this rate accounts for a standard risk premium inherent in the riskiness of the firm's activities. …

Wechselkursänderungen und Außenhandelsstruktur in der Bundesrepublik Deutschland / Exchange Rate Variations and Trade Structure in the Federal Republic of Germany

Zusammenfassung Die vorliegende Arbeit bietet eine empirische Untersuchung der Wirkungen von Wechselkursänderungen auf die Außenhandelsstruktur der BRD in der Zeit von 1982 bis 1991. Die ausgewählten Ergebnisse sind folgende: 1) Mit den aggregierten Gesamtdaten der Makroebene konnten keine Wirkungen von Wechselkursänderungen auf die internationale Wettbewerbsfähigkeit ermittelt werden. 2) Verwendet man jedoch disaggregierte Daten, wird ersichtlich, daß Wechselkursänderungen verschiedene Gütergruppen unterschiedlich beeinflussen. 3) Die Verbrauchsgüter waren abhängiger von Wechselkursänderungen als die anderen Gütergruppen. 4) Die meisten Investitionsgüter gehören zu den Gütern, deren internationale Wettbewerbsfähigkeit nicht von Wechselkursänderungen beeinflußt wurde. 5) Eine Wechselkursänderung schlägt je nach Gütergruppen unterschiedlich auf die Preise durch. Damit kann sie den internationalen komparativen Vorteil verändern.

Effects of exchange-rate variability on inflation variability: some additional evidence

This study re-examines the hypothesis that exchange-rate variability is another factor contributing to inflation variability. The analysis uses cross-country data for 41 countries over the current floating exchange-rate era. It employs the instrumental variable estimator, Emery's (1993) specification suggestions, centering of data technique and a longer and more recent sample period (1973Q1–1990Q4). The empirical evidence supports the above hypothesis and strengthens the case for stable exchange-rate policies.

Exchange Rate Regimes and Location

This paper investigates the effects of fixed versus flexible exchange rates on firms’ location choices and on countries’ specialization patterns. In a two-country, two-differentiated-goods monetary model, demand, supply, and monetary (as well as exchange rate) shocks arise after wages are set and prices are optimally chosen. The paper finds that countries are more specialized under flexible than fixed rates, and that the pattern of specialization is not uniquely defined by trade models but depends also on the exchange rate regime. The adoption of fixed exchange rates endogenously increases the desirability of this currency area by reducing the shock asymmetry. These results also shed light on the effects of exchange rate variability on trade.

Exchange Rate Regimes and Location

This paper investigates the effects of fixed versus flexible exchange rates on firms` location choices and on countries` specialization patterns. In a two-country, two-differentiated-goods monetary model, demand, supply, and monetary (as well as exchange rate) shocks arise after wages are set and prices are optimally chosen. The paper finds that countries are more specialized under flexible than fixed rates, and that the pattern of specialization is not uniquely defined by trade models but depends also on the exchange rate regime. The adoption of fixed exchange rates endogenously increases the desirability of this currency area by reducing the shock asymmetry. These results also shed light on the effects of exchange rate variability on trade.