Impact Of Exchange Rate Uncertainty Research Articles

Exchange Rate Uncertainty and India’s Bilateral Trade: A Gravity Model Approach

Through a gravity model, the paper attempts to analyse the impact of exchange rate uncertainty on India’s gross bilateral trade flows between its top five trading partners and its SAARC partners. Categorising the industries into five segments, namely, agricultural raw materials, chemicals, textile and clothing, metals and all other commodities, over 18 years (2000–2018), a panel data technique has been applied to examine the effect. The empirical result suggests that even though an exchange rate uncertainty shrinks the bilateral trade flows of agricultural raw materials for SAARC members, it enhances the trade flows across all industry verticals for the top five trading partners. Following the gravity model of trade, the study further suggests that the volume of bilateral trade between countries is proportional to the product of each country’s economic growth and inversely proportional to the distance between them. JEL: F10, F14,O24,D81

Exchange rate uncertainty and the connectedness of inflation

In this study, we examine the connectedness of exchange rate uncertainty and inflation. In an economy with a flexible exchange rate, price rigidities can lead importers to carry exchange rate risk and they impose a premium for the risk they face by increasing consumer prices. This pricing behavior provides a channel between exchange rate uncertainty and overall price level. We empirically analyze the impact of exchange rate uncertainty on inflation by using panel data from 149 countries over the period 1980–2017. The estimation results point that the uncertainty of the exchange rate has a significant and positive effect on inflation. We also show that effect of exchange rate uncertainty on inflation is nonlinear. As the exchange rate uncertainty increases, the size of its effect on inflation decreases. Moreover, the degree of exchange rate pass-through and the effect of exchange rate uncertainty on inflation differ among country groups and their effects on inflation have decreased through time.

The Impact of Exchange Rate Uncertainty on Coca Export Prices in Nigeria

The paper examined the impact of exchange rate on coca export in Nigeria. The Augmented Dickey Fuller Unit root, Johansen co-integration, ordinary least square, and diagnostic tests as well as error correction mechanism were adopted to analyzed the secondary time series data, between 1980 and 2019, generated from Food and Agricultural Organization (FAO), World Bank and the Central Bank of Nigeria (CBN). The ADF unit root test results showed that none of the variables was stationary at level I (0), whereas all the variables – cocoa export, agricultural export, exchange rate trade openness and world cocoa price became stationary after first difference or order one I(1). The Johansen co-integration test of the long run relationship revealed that both trace statistics and maximum eign value had two co-integrating equations at 5% whereas the trace statistics alone had 1 co-integrating equation at 1%; implying the existence of long run relationship between coca export, agricultural export, exchange rate, trade openness and world price of cocoa. The positive sign of the error correction mechanism of 0.07 suggested that deviation from the long run equilibrium is adjusted over the following time period by 7%. The t-test showed direct relationship between cocoa export and Exchange rate cum agricultural export prices, but inverse relationship with trade openness and world cocoa price. The diagnostic test revealed non existence of heteroskedasticity and serial correlation in the error term. The paper concluded that agricultural export, exchange rate, trade openness and world price of cocoa taken together affected cocoa export in Nigeria. The study recommended free market determination of exchange rate and accessibility of farmers to facilities provided by government to increase cocoa output and hence export. DOI: 10.7176/JESD/13-13-03 Publication date: July 31 st 2022

Investment response to exchange rate uncertainty: Evidence from Chinese exporters

This paper empirically examines the impact of exchange rate uncertainty on firm-level investment using data collected from the incidence of an exogenous uncertainty shock caused by the 2005 change in China's exchange rate policy. The results show that the higher RMB exchange rate uncertainty induced by the policy change significantly weakened Chinese exporters' response of investment to demand shocks. Moreover, exporters with higher degrees of capital irreversibility were found to be more sensitive to the uncertainty shock, which is consistent with the capital irreversibility hypothesis that has been identified in the macroeconomic literature. This paper also documents heterogenous investment responses to uncertainty across firms.

Exchange rate uncertainty and foreign direct investment in Africa: Does financial development matter?

AbstractThe orthodox view is that uncertainty deters investments and, by extension, private capital inflows. Paying specific attention to the volatility of the domestic exchange rate, foreign direct investment (FDI), and financial development indicators, this study investigates the impact of exchange rate uncertainty on FDI and whether financial development matters in such association. We establish our empirical relationship with a system general methods of moments (GMM) two‐step robust estimator with orthogonal deviations. We found evidence supporting a nonlinear U‐shaped relationship between uncertainty and FDI and that the impact of uncertainty on FDI depends on varying levels of uncertainty. We also document that uncertainty deters FDI flows and that countries with a well‐functioning financial development can transform the adverse impact of volatility on FDI. However, curbing the adverse effect depends on the specific indicator and the threshold value of financial development (financial institutions or financial markets).

Employment growth in the face of exchange rate uncertainty: The role of trade and foreign equity finance

AbstractThis paper looks at the role of external trade and foreign equity finance in determining the impact of exchange rate uncertainty on firm‐level employment growth in a major developing economy: India. Exchange rate uncertainty is found to affect firm‐level employment growth adversely on average, but the impact depends upon firm‐level characteristics such as exposure to foreign trade through imports and exports and firm‐level mark‐up. Foreign equity finance reduces the negative impact of exchange rate uncertainty on employment growth but the same cannot be said about access to domestic equity finance.

The impact of exchange rate uncertainty on exports: a panel VAR analysis

espanolResumen: En este articulo analizamos el impacto de la incertidumbre del tipo de cambio sobre los flujos de exportaciones en un panel de 27 paises durante el periodo 1994/01-2014/12. Para ello, aplicamos un enfoque de vectores autoregresivos con datos panel. Dividiendo el panel en dos subgrupos que incluyen economias exportadoras de manufactureras y economias exportadoras de productos basicos, observamos un efecto diferencial de la incertidumbre del tipo de cambio sobre las exportaciones. Esta incertidumbre tiene un impacto negativo en los paises exportadores de manufacturas, pero no afecta de forma significativa a los paises exportadores de productos basicos. Este resultado parece explicarse por las caracteristicas economicas de los paises, las cuales involucran la flexibilidad o rigidez del ajuste de las exportaciones a la incertidumbre del tipo de cambio. EnglishAbstract: In this paper we analyze the impact of exchange rate uncertainty on export flows among a panel of 27 countries throughout the 1994/01-2014/12 period. In order to do this, we apply a panel vector autoregressive model approach. By dividing the panel into two subgroups that involve manufacturing-exporting and commodity-exporting economies, we observe a different effect of exchange rate uncertainty on exports. This has a negative impact in manufacturing-exporting countries, but does not affect commodity exporting countries. This result appears to be explained by countries’ economics characteristics, involving the flexibility or rigidities of the export adjustment arising exchange rate uncertainty.

Exchange rate uncertainty and the timing of Chinese Outward Direct Investment

This paper investigates the timing of Chinese ODI under exchange rate uncertainty by employing the Cox proportional hazards model. Using matched data this paper finds both exchange rate level and volatility are the important determinants, and RMB depreciation and greater volatility will deter ODI. Such adverse effect is found more striking for non-SOEs, firms in the eastern region, and non-exporting firms. With China’s recent exchange rate formation mechanism reform, the impact of exchange rate uncertainty is expected to be stronger. These findings have important implications for China’s exchange rate regime reform and its “Going Global” strategy.

On the impact of exchange rate uncertainty on private investment in Ghana

AbstractHigh levels of private investment are correlated with higher economic growth and development across countries, but questions remain whether this relationship is sustainable given the high levels of exchange rate uncertainty in developing economies albeit other macroeconomic instabilities. This paper examines empirically the impact of real exchange rate uncertainty on private investment in Ghana. We, thus, apply the accelerator theory to investigate the contributing effect of real exchange rate uncertainty on the movement of private investment from the economic standpoint of an import‐dependent economy such as Ghana. The study employs annual time series data from 1980 to 2016. Moreover, we adopt the autoregressive distributed lag model of cointegration where we find evidence of a long‐run positive relationship between positive private investment and real exchange rate uncertainty as well as trade openness. The short‐run evidence provides a confirmation of the impact of inflation, trade, and real exchange rate uncertainty on private investment. Specifically, our results show that there is a positive pass‐through effect from real exchange rate uncertainty to private investment decision in resource allocation. Shocks from lending rate and terms of trade were found to exhibit negative effects on private investment in the short and long run. As a matter of policy, it is imperative for policymakers in developing economies to consider the effect of exchange rate and terms of trade associated with bilateral trade and investment‐related agreements to minimize the effects of contemporaneous shocks from uncertainties.

Exchange Rate Uncertainty and Workers’ Remittances: Empirical Bayesian Approach

Exchange rate is one of the important determinates of worker’s remittances to a country. Level of exchange rate as well as any fluctuation in it influences the volume of workers’ remittances. The present study uses data of workers’ remittances from ten major countries to Pakistan for the period 1973 to 2012. Uncertainty of exchange rate is estimated through GARCH model. We use Empirical Bayesian approach to compute posterior information (estimates, for which, the GMM estimates are used as prior in order to avoid biasness and inconsistency due to the presence of endogeniety in our model. The Empirical Bayesian estimates are found to be more efficient in terms of significance and correct signs of modeled variables. The findings suggest a significant role of home and host country characteristics in most of the cases. The findings also reveal a negative impact of exchange rate uncertainty on the inflow of remittances. The political instability reveals an insignificant impact on remittances. The study recommends different policy options for different host countries. Apart from the Middle East, the policy for other regions (like USA, Canada, and Germany etc.) must be considered separately to encourage inflow of remittances. Appropriate stabilization measures have to be taken on priority basis to curtail volatility of exchange rates and to ascertain regular inflow of remittances.

Exchange rate uncertainty and private investment in BRICS economies

Macroeconomic uncertainty is a major challenge facing policymakers. Exchange rate is usually associated with high level of volatility in developing economies. This has potential effect on other economic variables such as investment. This paper empirically examines the impact of exchange rate uncertainty on private investment in the BRICS bloc. Using cross-country time series data from World Development Indicators, for 1997–2015, we built an ARCH-based measure of exchange rate volatility to proxy uncertainty. The results show that uncertainty resulting from exchange rate volatility has a negative effect on private investment in both random and fixed effects as well as GMM estimations. Therefore, policy may focus on stabilizing domestic currencies in BRICS countries.

Exchange rate uncertainty and domestic investment in Ghana

The impact of exchange rate uncertainty on domestic investment remains a topical issue in international finance. The existing studies based on macro- or micro-level data have produced mixed findings leaving the issue widely open for further investigation. We revisit this issue at the macro-level by differentiating the short-run impacts of exchange rate uncertainty from long-run impacts. Using annual data for Ghana covering the period 1980–2015, we found that exchange rate uncertainty has differential impacts on domestic investment in the short run. That is, while the current level of uncertainty enhances investment, previous levels of uncertainty dampen investment. In the long run, exchange rate uncertainty has a positive impact on domestic investment. These findings are robust to alternative specifications of our model.

Short run and long run effects of exchange rate volatility on commodity trade between Pakistan and Japan

Earlier studies that examined the impact of exchange rate volatility on trade flows of Pakistan used aggregate trade data either between Pakistan and the rest of the world or at bilateral trade between Pakistan and her major trading partners. Not much support was found for significant impact of exchange rate uncertainty on trade flows by either group. Suspecting that they suffer from aggregation bias, we consider Pakistan–Japan trade flows but disaggregate them by commodity. In total, 44 Pakistani export industries to Japan and 60 Pakistani import industries from Japan were analysed. Contrary to our expectation and other disaggregated studies, not many industries were affected by exchange rate volatility neither in the short run nor in the long run.

Exchange Rate Uncertainty and Employment Dynamics: Evidence from India

This paper studies the impact of real exchange rate volatility on firm level employment using a dynamic panel data model applied on a panel of 700 Indian manufacturing firms. Real exchange rate volatility is found to have a significant and negative impact on firm level employment growth. Access to domestic equity finance is found to reduce the negative impact of exchange rate uncertainty significantly but the same cannot be said about foreign equity finance. Further, exposure to international trade in the form of exports and imports affects employment dynamics in the face of exchange rate uncertainty.

Exchange rate uncertainty and international portfolio flows: A multivariate GARCH-in-mean approach

This paper examines the impact of exchange rate uncertainty on different components of net portfolio flows, namely net equity and net bond flows, as well as their dynamic linkages. Specifically, a bivariate VAR GARCH-BEKK-in-mean model is estimated using bilateral monthly data for the US vis-à-vis Australia, Canada, the euro area, Japan, Sweden, and the UK over the period 1988:01-2011:12. The results indicate that the effect of exchange rate uncertainty on net equity flows is negative in the euro area, the UK and Sweden, and positive in Australia. The impact on net bond flows is also negative in all countries except Canada, where it is positive. Under the assumption of risk aversion, the findings suggest that exchange rate uncertainty induces a home bias and causes investors to reduce their financial activities to maximise returns and minimise exposure to uncertainty, this effect being stronger in the UK, the euro area and Sweden compared to Canada, Australia and Japan. Overall, the results indicate that exchange rate or credit controls on these flows can be used as a policy tool in countries with strong uncertainty effects to pursue economic and financial stability.

The Impact of Exchange Rate Uncertainty on Exports in South Africa

This paper examines the impact of real effective exchange rate uncertainty (REER) on aggregate exports of South Africa for the period 1986Q4–2013Q2. Using a bivariate framework where the structural vector autoregression (VAR) is modified to accommodate bivariate GARCH-in-Mean (GARCH-M) errors, we find that exchange rate uncertainty has a significant and negative effect on exports. Comparing the response of exports to a shock in exchange rate from a model that includes the REER uncertainty with results from a model that restricts the coefficient of the exchange rate uncertainty to zero, we find that the response is more pronounced in the former model. Furthermore, real exports respond asymmetrically to negative and positive shocks of REER of the same size.

Exchange-rate risk and UK-China trade: evidence from 47 industries

Purpose– Recent years have seen a rapid expansion of studies that examine the effects of exchange-rate risk on bilateral exports and imports for specific industries. Since the underlying theory is ambiguous, each case must be studied individually. This paper considers British trade with China, for 47 types of product, over the period from 1978 to 2010. Consistent with the underlying theory, cointegration analysis shows that most industries register no effect due to volatility in the long run, while some trade flows are reduced and a handful are even increased. An analysis of industry characteristics suggests that while the type of good might play little role on an industry's specific results, a product's trade share does. This is the case for UK imports of Chinese goods, perhaps because large Chinese exporters are able to successfully hedge against exchange-rate risk. The paper aims to discuss these issues.Design/methodology/approach– The method is based on bounds testing approach to cointegration and error-correction modeling.Findings– The paper arrives at two key conclusions. First, as has been shown previously for other country pairs, most industries demonstrate no long-run response to exchange-rate volatility. A fraction of industries are affected, and most of these effects are negative.Research limitations/implications– This research pertains to the case of industry trade between the UK and China only.Practical implications– The paper identifies industries that are affected by exchange rate uncertainty.Originality/value– No study has looked at the impact of exchange rate uncertainty on the trade flows between China and the UK at commodity level.

Exchange Rate Uncertainty and Trade between U.S. and Canada: Is There Evidence of Third-Country Effect?

In a recent article, we assessed the impact of exchange rate uncertainty on the trade flows of 152 industries that trade between the United States and Canada. We found that, in the short run, trade flows of almost two-thirds of the industries were affected by exchange rate uncertainty. However, in the long run, less than one-third of the trade flows were affected. Almost all industries that were affected by exchange rate uncertainty were found to be small, except for road motor vehicles—which make up to 20% of both imports and exports. Exports and imports of this largest industry were adversely affected by exchange rate uncertainty. We wonder how the results will change if we account for the “third-country effect,” especially the fluctuation of the U.S. dollar against the currency of the third member of NAFTA, Mexico. We find that, again, in the short run almost two-thirds of the industries are affected by exchange rate uncertainty. However, in the long run, only one-third of the trade flows are affected. The third-country effect seems to be present in the same number of industries, in the short run as well as in the long run.

Exchange Rate Uncertainty and International Portfolio Flows

This paper examines the impact of exchange rate uncertainty on different components of portfolio flows, namely equity and bond flows, as well as the dynamic linkages between exchange rate volatility and the variability of these two types of flows. Specifically, a bivariate GARCH-BEKK-in-mean model is estimated using bilateral data for the US vis-a-vis Australia, the UK, Japan, Canada, the euro area, and Sweden over the period 1988:012011:12. The results indicate that the effect of exchange rate uncertainty on equity flows is negative in the euro area, the UK and Sweden, and positive in Australia, whilst it is negative in all countries except Canada (where it is positive) in the case of bond flows. Under the assumption of risk aversion, this suggests that exchange rate uncertainty induces a home bias and causes investors to reduce their financing activities to maximise returns and minimise exposure to uncertainty. Furthermore, since exchange rate volatility and the variability of flows are interlinked, exchange rate or credit controls on these flows can be used to pursue economic and financial stability.

Exchange rate uncertainty and US bilateral fresh fruit and fresh vegetable trade: an application of the gravity model

In order to analyse the effect of exchange rate uncertainty, we apply an empirical gravity equation to two sets of US bilateral trade data: fresh fruit over the period 1976–1999 for a panel of 26 countries; and fresh vegetables over the period 1976–2006 for a panel of nine countries. Based on panel estimation methods, and using both a moving SD measure and the Perée and Steinherr (1989) measure of exchange rate uncertainty, the results show that US bilateral fresh fruit trade has been negatively affected by exchange rate uncertainty. We also find some evidence that the exchange rate between the US dollar and the currencies of Latin American trading partners accounts for most of the negative impact of exchange rate uncertainty on bilateral trade flows in fresh fruit. In contrast, when using panel estimation methods and both measures of exchange rate uncertainty, we find no statistically significant evidence for any negative effect of exchange rate uncertainty on US bilateral fresh vegetable trade. However, we do find a statistically significant negative effect for exchange rate uncertainty when we estimate a US export gravity equation for fresh vegetables using the same panel of countries.