Real Exchange Rate Volatility Research Articles

Asymmetries in tourism demand

ABSTRACT This research investigates the impact of key macroeconomic determinants on tourist demand in Greece, focusing on destination competitiveness, income levels, real interest rates, real exchange rate volatility (ERV), trade openness, technology infrastructure, human capital, and travel costs. By introducing a novel index, the study comprehensively evaluates these influences on Greece’s tourist influx over the long term. It also explores the asymmetric long-term impacts of ERV and tourists’ income, highlighting the importance of the direction and size of these effects. The findings are essential for developing effective long-term economic policies to enhance tourism in economies like Greece, where tourism significantly contributes to economic development.

The Influence of Exchange Rate Fluctuation on Foreign Direct In-vestment in Nigeria (1986-2022)

Using yearly data series spanning 36 years, from 1986 to 2021, the research empirically evaluates the influence of exchange rate fluctuation on foreign direct investment in Nigeria. The study’s objectives were focus on examining the extent of exchange rate volatility in Nigeria and ways by which exchange rate volatility impact on foreign direct investment in Nigeria. Secondary source of data was employed from world development indicator (WDI) and central bank of Nigeria (CBN). Autoregressive Distributed Lag (ARDL) were employed and the GARCH (1, 1) model was used in investigating the model built and were analyzed using multicollinearity with the use of Augmented Dickey-Fuller (ADF) test to verify that the variables are stationary in order to make sure the estimated results are not erroneous. Findings from the study shows that real exchange rate volatility (REERVOL) has a long-term and short-term detrimental impact on FDI and negative long- and short-term interest rate coefficients demonstrate that an unfavorable interest rate exacerbates the already diminishing foreign direct investment (FDI) flows to Nigeria as a result of REERVOL. The policy was recommended for improving FDI through effective exchange rate management.

Effects of real effective exchange rate volatility on export earnings in Ethiopia: Symmetric and asymmetric effect analysis

The exchange rate is one of the key monetary policy instruments used to dictate the economy. However, the effect of exchange rate volatility on macroeconomic outcomes has been a subject of debate in previous research. Thus, this study examined the effects of real effective exchange rate (REER) volatility on Ethiopia's export earnings using quarterly data covering 2007 to 2021. The GARCH model is employed to estimate the volatility of the real effective exchange rate, and its effect is examined at the aggregate and disaggregate levels. Disaggregation is made at commodity and partner country levels. Besides these, the study also examined the symmetric and asymmetric effects of exchange rate volatility on the three categories of export earnings. To estimate the effects, both the linear autoregressive distributed lag (ARDL) and nonlinear ARDL (NARDL) models are employed. The short-run ARDL result shows that the real effective exchange rate and its volatility affect export earnings only in a few cases. Real effective exchange rate appreciation is significant and reduces total export earnings and export earnings from vegetables, meat, and oilseed-related products. Similarly, exchange rate volatility reduces total export earnings and earnings from coffee, vegetables, and meat-related products. At the aggregate level, the NARDL result shows that exchange rate volatility has an asymmetric effect on total export earnings. Positive volatility reduces total export earnings, while negative volatility is not significant. At the commodity level, volatility also has an asymmetric effect on earnings from coffee and meat exports in the short run. However, in the long run, there is no asymmetric effect of exchange rate volatility on total and commodity-level export earnings. In terms of the country of destination, there is no strong evidence of the effect of real effective exchange rate appreciation and its volatility on export earnings. Thus, policies that stabilize the volatility of the exchange rate are needed in Ethiopia in order to enhance export earnings.

Asymmetric effects of third-country exchange rate risk: A Markov switching approach

The standard tourism demand models consider the effects of the bilateral real exchange rate between origin and destination in a linear context. Our study contributes to the literature by incorporating the asymmetric effects of real exchange rate volatility of home and third-countries. We propose a Markov Switching ARDL model to estimate outbound tourism demand over the period of 2002–2019. This model allows us to examine both the short- and long-run effects in the likely presence of asymmetric effects and structural breaks. The results reveal that there are nonlinear asymmetric long- and short-run effects of the third-countries exchange rate volatility. We also identify relevant structural changes coinciding with major events.

Openness and Real Exchange Rate Volatility: Evidence from China

In recent years, China has introduced a series of trade and financial liberalization policies and taken a crucial step towards the internationalization of RMB. These new developments bring about one question: how has openness affected the RMB real exchange rate volatility? Our empirical results reveal that in the long term, both trade and financial openness reduce exchange rate volatility; in the short term, the effect of financial openness varies across the three financial sub-accounts. Financial development can magnify (mitigate) the impact of trade openness on volatility in the short (long) term, but its role in affecting the impact of financial openness depends on the financial sub-account involved. Economic policy uncertainty (EPU) weakens the impact of openness on exchange rate volatility. In addition, financial openness absorbs more external shocks than trade openness. Foreign exchange reserves, while offsetting financial crisis shocks, cannot adequately absorb current account balance shocks.

An empirical investigation of the relationship between real exchange rate and innovation: Evidence from China

AbstractThe aims of this study is to investigate the relationship between real exchange rate and innovation in China for the period spanning from 1985 to 2020 using an annual time series data collected from different sources. The study employs autoregressive distributed lag bound test and other econometrics techniques to analyse the short‐run and long‐run relationship among the variables. The findings of the study reveal the existence of short‐run and long‐run relationship between real exchange rate (undervalued RMB) and technological innovation. Furthermore, real exchange rate (undervalued RMB) has positive effect on innovation while real exchange rate volatility is negatively affect innovation. Based on the above empirical findings, the study suggests some policy implications which are considered important for fostering rapid and sustainable economic growth.

Impact of Exchange Rate Volatility on Export in Nigeria: 2008 – 2021

This study examined the impact of exchange rate volatility on export in Nigeria. The specific objectives of the study were to evaluate the individual impacts of parallel market-, interbank, real and nominal-exchange rate volatilities on Nigeria’s export. The study employed the ARDL-Error Correction Model and Bound Test using secondary data sourced from the Statistics Database of the Central Bank of Nigeria. Bounds test results for each of the four models, showed long-run relationship among the variables. The results showed that in the long-run, all the exchange rate volatility measures showed negative sign as expected but only the real effective exchange rate volatility was statistically significant in the long run. In the short-run, the average impact of exchange rate volatility was negative in all the four models as expected. However, volatility in real effective exchange rate and nominal effective exchange rate were statistically significant. Finally, if the Nigeria’s export deviates from its long-run path due to short-run perturbations, the tendency for it to return to long-run equilibrium from the four models lied between 25% and 39%. Based on these results, this study recommended that efforts to improve Nigeria’s trade with other countries should consider stabilizing the Naira exchange rate. The Central Bank of Nigeria should shore up reserve accretion as well as diversify the country’s export basket and source for new export destinations.

Is the floating exchange rate a shock absorber in Albania? Evidence from SVAR models

The choice of a foreign exchange regime hinges primarily on whether the real exchange rate acts as a shock absorber or reverberator for macroeconomic fluctuations. This policy choice is considered central especially prior to joining currency areas such as the Eurozone. We investigate whether Albania’s current floating exchange rate regime contributes to macroeconomic stability, or generates volatility. Using three different structural vector autoregression techniques, and an expanded five-variable model, we show that the real exchange rate has played a shock absorbing role, buffering the Albanian economy primarily from real demand shocks. The analysis reveals that monetary shocks and supply-side shocks have modest contributions in real exchange rate volatility. This evidence in favor of the “shock absorbing” view of exchange rates lends support to Albania’s policy choice of a flexible exchange rate system. If in future Albania considers joining a currency area, its monetary authority will need to pay attention to real currency misalignments as well as the availability and flexibility of alternative adjustment mechanisms.

Debalansi tekućeg računa i nestabilnost deviznog kursa - empirijski dokazi iz Indonezije

Whether macroeconomic fundamentals affect the exchange rate volatility in emerging markets with an inflation-targeting regime or not is highly challenging. In this paper, the impact of the current account deficits and foreign reserves on the volatility of real exchange rates. Applying threshold quantile regression models related to Indonesia over the period from 2005(7) to 2021(12), it is concluded that both variables play an important role in controlling the exchange rate instability. Both coefficients are also found to have an upward linear pattern. The asymmetric impact of current account balance holds. Claiming that a two-percent current account deficit in the GDP is the safe amount of the deficit that will not significantly affect the foreign-exchange rate is justified as such. The asymmetric behavior of the current account balance has the potential to trigger real exchange rate volatility, thereby undermining the monetary policy within the framework of the inflation targeting regime. Accordingly, the optimal stock of foreign reserves might avoid imposing dual goals of inflation targeting and exchange rate stability.

환율변동성이 베트남의 무역수지에 미치는 실증적 영향: DYNARDL 모형 분석

This study investigate the effect of exchange rate volatility on trade balance for Vietnam during the period of 2010 from first quarter to the 2021 second quarter. The dynamic simulations of autoregressive distributed lag (DYNARDL) approach is applied to analyze positive and negative changes on trade balance of exchange rate volatibility, finalcial development, financial globalization and economic growth in Vietnam. The conditional variance of the generalized autoregressive conditional heteroskedasticity (GARCH) model is used to estimate the exchange rate volatility. The results indicated a significant positive effect of real exchange rate volatility on Viet Nam’s balance trade while there was no effect of nominal exchange rate volatility.

Exchange Rate Volatility and Macroeconomic Variables in South Africa

The significance of the exchange rate in determining a country's macroeconomic performance is indisputable. Thisstudy investigated the impact of exchange rate volatility on macroeconomic variables in South Africa using time series data from 1979 to 2019. Only six macroeconomic variables have been included in this study: GDP, FDI, growth rate, INFR, INT, and trade openness. These variables were chosen as dependent variables, with real exchange rate volatility as the independent variable. The GARCH model was used to generate real exchange rate volatility, and the Ordinary Least Square regression technique was employed to analyze the relationship between dependent and independent variables in this study. The impact of exchange rate volatility on macroeconomic variables in South Africa was substantiated by this study's findings. It is also concluded that exchange rate volatility has a positive impact on growth, inflation, and interest rates (INT) while having a negative impact on FDI, GDP, and trade openness (OPENN). The results suggest that to increase trade and foreign direct investment, South African authorities should consider the existence and level of exchange rate volatility as well as the expected effects of the exchange rate on each macroeconomic variable.

The nexus between real exchange rate misalignment and US–China trade: evidence from post RMB regimes

This paper investigates the impact of real exchange rate volatility and misalignment on exports and imports between China and the United States. Our empirical analysis used the quarterly time series data over the 1994Q:1–2019Q:4 period. We used the ARDL-bound testing approach for the short- and long-run relationship. The empirical results reveal that China’s real exchange rate volatility and misalignment significantly impact China’s real exports and imports over the sample period. In the short-run, the relationship between real exchange rate misalignments and China’s exports is positive, whereas negative with imports from the United States. In the long run, the real exchange rate misalignment positively affects exports and negatively affects imports. The evidence suggests that both higher real exchange rate volatility and misalignment directly affect the relative price of goods and encourage China exports to United States.

Effect of Exchange Rate Volatility on Exports: An Empirical Analysis of Disaggregated Data of the Indian Manufacturing Sector

The effect of real exchange rate volatility on real exports is explored empirically in this article. The study uses disaggregated Indian manufacturing sector data consisting of seven categories: leather & leather manufactures, chemicals and related products, engineering goods, electronic goods, textiles (excluding readymade garments), readymade garments and other manufactured goods. The analysis is focused on India’s quarterly data from 2004Q2 to 2018Q2 using the ARDL bound test procedure. The ARDL bound test results show that real exports are co-integrated with fluctuations in real exchange rates and world real GDP. The study also reveals that exchange rate volatility has mixed effects on manufacturing exports both in the long run and short run. The impact of real-world GDP (WGDP) on real exports has been found positive and significant in the long run except for leather and leather manufacturers where it is negative and significant. In the case of the short-run, real-WGDP has mixed effects on exports. JEL Classification: C22, F14, F31, F1

Examining the Asymmetric Effects of Third Country Exchange Rate Volatility on Trade between the US and the EU

This paper aims to examine the symmetric and asymmetric effects of third country exchange rate volatility on the trade flow between the US and EU from January 2003 through March 2021. The monthly disaggregated data of the top twelve export and import industries are the sample frame. We find that separating increased volatility from declines and introducing a nonlinear adjustment to the volatility shows a more significant outcome than symmetric analysis. Different industries carry distinctive behaviors regarding exchange rate risk, and the third country effect plays a vital role in trade. Moreover, increased CNY/USD real exchange rate volatility increases bilateral trade between the US and EU.

The origin of the law of one price deviations: Insights from the good-level real exchange rate volatility

What is the origin of the law of one price deviation? To address this issue, this paper exploits the properties of good-level real exchange rate (RER) volatility; nominal (real) shocks predict the positive (negative) correlation between price stickiness and volatility. Using the US and 25 European countries, we estimate the contribution of each shock based on a two-country model in local currency pricing and the empirical analysis. The results indicate that the weighted average contribution of nominal shocks to the overall good-level RER volatility is 71%.

Effect of Real Exchange Rate Volatility and Selected Macroeconomic Variables on Trade Exports Performance in Kenya

Kenya’s export performance is still constraint by high level of inflation, high-interest rates, low savings, low investments, and fluctuating exchange rates. Generally, Kenya’s exports have performed dismally in the recent past. It is not yet clear as to whether this poor export performance can be attributed to exchange rate volatility since, existing empirical evidence show mixed findings. The study sought to establish the impact of exchange rate volatility on Kenya’s exports performance for the period 1974 – 2018. Autoregressive Distributed Lag model (ARDL) with bounds test was estimated and it was found that ARCH term t-ratio was significant which indicated that exchange rate is volatile. exchange rate volatility, terms of trade, inflation money supply and trade openness were significant. Based on these results, it is recommended the government should reconsider exchange rate policies that will prevent high exchange rate fluctuations, suggests that the monetary authorities in the Kenya should come up with monetary policy strategies that will help drive the economy better are necessary for economic expansion, Kenya should maintain its market determined exchange rate and implement a monetary policy aimed at confining inflation to levels that are at par or lower than those of trading partners, the government should review trade policies and take advantage of trade openness to reap from trade liberalization. The study further realized interdependence between exchange rate stability, macroeconomic stability and export performance and hence policy makers need to consider the existing degree and likely effects of exchange rate volatility while designing, developing and implementing trade policies in Kenyan Economy.

Effect of Real Exchange Rate Volatility and Selected Macroeconomic Variables on Trade Exports Performance in Kenya

Effect of Real Exchange Rate Volatility and Selected Macroeconomic Variables on Trade Exports Performance in Kenya

External Debt and Real Exchange Rate Volatility in South Asia

This study empirically examines the mechanism that connects debt accumulation to exchange rate volatility through the lens of important macroeconomic variables in South Asian Countries. One of the most influential explanatory factors behind exchange rate volatility is deemed as the flow of external debt for these countries. Using data from the World Development Indicators for the period 1980–2020, it is shown that external debt increases exchange rate volatility, significantly. The model is identified via panel Granger tests for relevant variables, estimated for a wide range of covariates and tested for all possible sources of endogeneity via subsequent robustness analyses. JEL Classification: C33, F31, H6, O53

An asymmetric impact analysis of the exchange rate volatility on commodity trade between the U.S. and China

This paper uses an asymmetric ARDL model to examine the influence of real exchange rate volatility on trade flows between the United States and China from January 2003 to June 2020, with the top twelve sectors of disaggregated data being employed. The results show that nonlinear adjustment of the volatility has a more significant outcome than the ARDL model on both U.S. exports to and imports from China in the long-run, while increased volatility will boost both U.S. imports from and exports to China. Besides, it shows that China benefits from U.S.- China trade on the selected sectors after joining the WTO more than the United States.

Current Account Imbalances, Real Exchange Rates, and Nominal Exchange Rate Variability

AbstractThis paper globally analyzes the bivariate relation between large current account imbalances and the real exchange rate over different degrees of nominal exchange rate variability. Employing both linear and nonlinear panel estimation procedures, we typically find an inverse long-run link between large imbalances and the real exchange rate at lower nominal exchange rate rigidity levels. This is in contrast to the often non-existent or positive comovement that materializes under lower nominal exchange rate variation. Our results thus suggest that greater nominal exchange rate adjustment can induce a stabilizing “current account”-“real exchange rate” relation. Meanwhile, current account adjustment speeds up with more flexible nominal exchange rates. Along the cross-section, the most salient findings are i) the striking positive relation between current account persistence and real exchange rate persistence based on country-specific estimates and ii) the inverse correlation between persistence in either the current account or real exchange rate and nominal exchange rate volatility.