Real Exchange Rate Volatility Research Articles

Impact of exchange rate and exchange rate volatility on foreign direct investment inflow for Mauritius: A dynamic time series approach

AbstractStudies focusing on the determinants of foreign direct investment (FDI) inflow to Sub‐Saharan African countries remain fairly limited. Such existing research mostly focuses on the level of the exchange rate, often ignoring its volatility. This paper assesses the impact of the real exchange rate and exchange rate volatility on FDI flows for the case of Mauritius, one of the best economic performers on the continent. Using dynamic time series analysis, namely a Vector Error Correction Model, over the period 1976–2018, exchange rate volatility was found to negatively impact FDI while depreciating real exchange attracts foreign investors. The openness level, wages, literacy level and tax are also observed to be ingredients of FDI in both the long and short term. Moreover, the analysis validates the dynamic nature of FDI in Mauritius.

Exchange Rate Volatility and Import Trade Flow Evidence From India-U.S. at Industry Level

The centre interest of the study is to explore the impact of exchange rate volatility on the India-U.S. trade flow of Import on 6 industries spanned from September 2002 to June 2019. We investigate the relationship at disaggregate level by industry-wise data with monthly frequency. We employ exponential generalized autoregressive conditional heteroscedasticity (E-GARCH) model to gauge volatility and thereafter ARDL bound testing approach to unveil the short and long-run association of real exchange rate volatility and import. The empirical analysis implies the existence of both short-run and long-run effect in 5 importing industries except manufactured (engineering) goods. While real exchange volatility appears to have statistically significant effect in short-run, but also estimated short-run lasts onto long-run effect in only three industries. The results confirm the information of import in time-series analysis. The finding of the study helps to undertake the view of invariability and considering the industry before policy making.

Exchange rate volatility and import trade flow Evidence from India-U.S. at Industry level

The centre interest of the study is to explore the impact of exchange rate volatility on the India-U.S. trade flow of Import on 6 industries spanned from September 2002 to June 2019. We investigate the relationship at disaggregate level by industry-wise data with monthly frequency. We employ exponential generalized autoregressive conditional heteroscedasticity (E-GARCH) model to gauge volatility and thereafter ARDL bound testing approach to unveil the short and long-run association of real exchange rate volatility and import. The empirical analysis implies the existence of both short-run and long-run effect in 5 importing industries except manufactured (engineering) goods. While real exchange volatility appears to have statistically significant effect in short-run, but also estimated short-run lasts onto long-run effect in only three industries. The results confirm the information of import in time-series analysis. The finding of the study helps to undertake the view of invariability and considering the industry before policy making.

Exchange Rate Volatility and India-U.S. Export at Commodity Level: Evidence from an Autoregressive Distributed Lag Approach

The paper focuses on the impact of exchange rate volatility on the trade flow between India and U.S. Previous research on the trade flow of India has concentrated on the overall aggregate export of India with a cross border nations. Many maintain the work on bilateral trade pair-wise although a very few have observed about the commodities trade at disintegrated scale. This paper explores Indian export trade at disaggregate by commodity-wise, undertaking 60 Indian exporting commodities to U.S. We apply generalized autoregressive conditional heteroscedasticity (GARCH) based models to gauge the real exchange rate volatility and to discover the shortrun and longrun relationships, an autoregressive distributed lag model is applied on the time series data. The empirical analysis at disaggregate level of export indicates the shortrun as well as longrun effect of exchange rate volatility. However, the estimated shortrun effect which last onto longrun effect is in 16 exporting commodities. This paper provides more specific information about the relationship between exchange rate volatility and bilateral export commodities using individual level data. The finding of the study helps to undertake the view of invariability and considering the industry before policy making.

Currency Substitution and Exchange Rate Volatility in Nigeria: An Autoregressive Distributed Lag Approach

This study investigates the relationship between exchange rate volatility and currency substitution in Nigeria, using Autoregressive Distributed Lag (ARDL) model. After accounting for the presence of structural breaks, evidence from the findings shows that domestic interest rate and expected changes in exchange rate are important determinants of currency substitution. In addition, there is empirical support for a positive relationship between exchange rate volatility and currency substitution both in the short- and long-run. This implies that higher real exchange rate volatility is associated with an increased level of currency substitution. In view of these findings, the paper calls for sustained efforts by the monetary authority in containing exchange rate volatility and inflation as a way of curbing the spate of currency substitution in the country.

Impact of Exchange Rate Fluctuations on India’s Manufacturing Exports: An Empirical Investigation on Long-Run Relation

After the collapse of the fixed exchange rate system of Bretton Woods, the fluctuations of exchange rate and its impact on macroeconomic performance and trade in countries around the world are becoming an increasing debate among researchers and policymakers. This study empirically investigates whether fluctuations in real exchange rate may affect real exports in the Indian context. The study has employed autoregressive distributed lag (ARDL) bound test procedure to analyse the long-run relationship among variables using quarterly data from 2005Q1 to 2017Q4. The results of the ARDL bound test reveal that real exports are cointegrated with relative prices, real exchange rate volatility and world real GDP. The study has found negative but insignificant impact of exchange rate volatility on exports, but world GDP as a proxy of foreign economic activity and real effective exchange rate as relative prices have positive and statistically significant impact on Indian manufacturing exports. Further, the ARDL short-run error correction model implies that while the model may temporarily deviate from its long-run equilibrium, the deviations adjust towards the equilibrium level in the long run. JEL Codes: F01, F31, F14

Asymmetric effect of exchange rate volatility on trade balance in Nigeria

<abstract> <p>The relationship between real exchange rate volatility and the trade balance has been a contentious issue since the fall of Bretton woods agreement of 1973, owing to the lack of unanimity on the effect. This article provides empirical evidence of the link between the real exchange rate volatility and the trade balance in the light of financial development, confirming the assertion that the effect is significantly dependent on the country's level of financial development. Due to Nigeria's relatively undeveloped financial system, its exchange rate dampens the country's exports. Rather than studying the relationship in isolation, we examine the moderating role of financial development on the link between export and the real exchange rate volatility in this paper. The empirical estimation is based on the Nigeria's data set spanning the years 1980–2019, and it employs threshold autoregressive non-linear co-integration and non-linear ARDL estimation techniques. According to the findings, financial development magnifies the beneficial benefits of the real exchange rate on Nigeria's foreign trade. It also states that the uncertainty in foreign capital flows has a negative impact on Nigeria's international trade. The findings have broad policy implications, implying that in order to diversify and improve the economy's future growth and associated international trade, Nigeria's policymakers should promote adequate financial sector development, as financial shocks are amplified by poorly implemented credit markets.</p> </abstract>

Revisiting the role of exchange rate volatility in Turkey’s exports: Evidence from the structural VAR approach

The exchange rate is both an important economic variable when determining a country?s export volume and an indicator of its international competitiveness. This paper re-investigates the impact of real exchange rate volatility on Turkey?s exports using the structural vector autoregression method and monthly data from 2003:01 to 2019:12. Empirical evidence shows that real exchange rate and exchange rate volatility do not affect exports in Turkey. On the other hand, external income has had a slight effect on Turkey?s exports in the post-global-crisis period. The findings show that other factors which effect macroeconomic indicators in the Turkish economy should also be considered.

U.S Agricultural Export Competitiveness and Export Market Diversification

This paper examines the structural relationship of foreign GDP growth, real exchange rate volatility, and the impact of exogenous shocks on U.S. agricultural export growth. The intertemporal dynamics of export demand are analyzed within the structural cointegrating vector autoregressive framework. We find that: (1) An increase (decrease) in importing countries’ trade-adjusted GDP leads to an increase (decrease) in U.S. agricultural exports; (2) A real appreciation (depreciation) of the U.S. dollar results in a decline (increase) in U.S. agricultural exports; (3) Exports of high-value processed agricultural products are more sensitive to changes in foreign income and exchange rate fluctuations than exports of low-value grains and bulk commodities; (4) In response to exogenous shocks, deviations from the predicted equilibrium level of exports adjust at a much faster rate for exports of grains and other bulk commodities than high-value products; and (5) The present concentration of U.S. agricultural commodity exports to a few developed countries is increasingly problematic, and U.S. agricultural exports may benefit not only from policies intended to increase trade with existing developing country importers but also from policies that aim to export agricultural commodities to emerging markets. The paper not only highlights the importance of including the long-run relationship when modeling short-run dynamics in agricultural trade models, but is also the first to use this method to comprehensively estimate macroeconomic linkages of U.S agricultural exports, simultaneously across a number of agricultural products, importing countries, over a period of five decades.

Mussa Puzzle Redux

The Mussa (1986) puzzle - a sharp and simultaneous increase in the volatility of both nominal and real exchange rates after the end of the Bretton Woods System of pegged exchange rates in early 1970s - is commonly viewed as a central piece of evidence in favor of monetary non-neutrality. Indeed, a change in the monetary regime has caused a dramatic change in the equilibrium behavior of a real variable - the real exchange rate. The Mussa fact is further interpreted as direct evidence in favor of models with nominal rigidities in price setting (sticky prices). We show that this last conclusion is not supported by the data, as there was no simultaneous change in the properties of the other macro variables - neither nominal like inflation, nor real like consumption, output or net exports. We show that the extended set of Mussa facts equally falsifies both flexible-price RBC models and sticky-price New Keynesian models. We present a resolution to this broader puzzle based on a model of segmented financial market - a particular type of financial friction by which the bulk of the nominal exchange rate risk is held by a small group of financial intermediaries and not shared smoothly throughout the economy. We argue that rather than discriminating between models with sticky versus flexible prices, and monetary versus productivity shocks, the Mussa puzzle provides sharp evidence in favor of models with monetary non-neutrality arising due to financial market segmentation. Sticky prices are neither necessary, nor sufficient for the qualitative success of the model.

Real Exchange Rate Volatility and Financial Integration: Evidence from Latin American Countries

This research is an endeavor to reveal the dynamic association of real exchange rate volatility with real and monetary shocks and particularly with international financial integration in selected eight Latin American countries during 1992-2018. The estimation strategy employed in this research is the Generalized Method of Moments (GMM) to empirically obtain consistent estimates. Empirical results strongly supported the significant negative impact of financial integration on real exchange rate volatility when financial integration is approximated by the Chinn-Ito index. Furthermore, output volatility and money supply volatility both significantly contributed to increasing real exchange rate instability. An important policy implication is that process of financial integration needs to be more strengthened and shocks to output and money supply needs to be reduced to achieve lesser fluctuations of the real exchange rate in Latin American countries.

Autoregressive Distributed Lag (ARDL) analysis of U.S.-China commodity trade dynamics

This study examines the U.S.-China trade dynamics focusing on the leading commodity imports and exports in both manufacturing (SITC 5–8) and crude materials (SITC2) sectors at SITC 3-digit level. The effect of real income of China and the U.S., bilateral real exchange rates and its volatility, U.S. investment, the “third country” exchange risk effect, and the role of financial deepening and human capital investment are evaluated using 2000–2016 quarterly data. The Autoregressive Distributed Lag (ARDL) model results for the U.S. inpayments and outpayments indicate that real exchange rates play the most significant role, affecting most commodities in both the short-and long-run, with the expected signs. While the relationship of most U.S. commodity exports and imports with the real income of both China and the U.S. have the expected long-run positive effect, the average responsiveness of the U.S. imports to U.S. real income is larger than that of the U.S. exports’ response to Chinese real income. This, combined with the relatively larger exchange rate elasticity value for the U.S. exports, suggests a greater U.S.-China trade deficit following the real appreciation of the yuan, which is consistent with the actual post-2005 trade experience. Both the real exchange rate volatility measures and the U.S. foreign direct investment in China are found to have a limited significant relationship with both U.S. commodity imports and exports. Although financial deepening and education affect trade in both directions, the positive influence of human capital is consistent and evident across most affected commodity cases.

The Real Exchange Rate and Economic Growth: A Survey

AbstractThis paper offers a systematic survey of recent research evaluating the impact of the level and volatility of the real exchange rate (RER) on economic growth. Existing empirical work finds a positive association between RER levels and economic growth, especially in developing countries. This relationship appears to be driven by cases of overvaluation hurting and undervaluation favoring growth. RER volatility, in turn, has a negative impact on growth. Together with the review of the literature, panel growth regressions with the 9.0 version of the Penn World Table database are carried out to evaluate previous findings. The paper also surveys the literature studying the mechanisms that explain the positive growth effect of the RER. One of them emphasizes that an undervalued RER reduces macroeconomic volatility, favoring capital accumulation and growth. Another one stresses that a competitive RER stimulates capital accumulation in modern tradable activities, facilitating structural change and economic development.

The Impact of Rand/Pula Exchange Rate Volatility on Botswana’s Economic Growth

This paper undertakes an investigation of the impact of the Rand/Pula exchange rate volatility on Botswana’s economic growth. The paper is using annual time series data, from 1977 to 2018. The Generalized Method of Moment (GMM) is employed to evaluate the impact of the real exchange rate volatility on Botswana’s economic growth. The GARCH model results found the Pula/Rand exchange rate to be volatile. The Rand/Pula exchange rate volatility does not have an impact on Botswana’s economic growth. This finding mirrors those of Kaur et al. (2019) and Musyoki et al. (2012). They found negative but insignificant impact of exchange rate volatility on economic growth in Malaysia and Kenya, respectively. Our empirical findings suggest that Botswana’s economic growth is largely explained by trade openness and growth of labour force and not influenced by the Rand/Pula exchange rate volatility.

The determinants of real exchange rate volatility in South Africa

AbstractThis paper investigates the determinants of medium to long‐run real exchange rate volatility in South Africa over the period 1986–2015. The main objective of the paper is to analyse the impact of trade openness on real exchange rate volatility following conflicting results offered by empirical studies. Employing the Autoregressive Distributed Lag (ARDL) cointegration approach and using a variety of specifications and robustness tests, results show that trade openness has an impact on real exchange rate volatility. The interaction term of trade openness and the dummy variable for capital account liberalisation leads to a significant negative impact on real exchange rate volatility. Furthermore, findings indicate that volatility of output, commodity prices, money supply and government consumption, and the exchange rate regime significantly influence rand volatility.

The Effect of Exchange Rate Volatility on Economic Growth: Case of the CEE Countries

The exchange rate is a key macroeconomic factor that affects international trade and the real economy of each country. The development of international trade creates conditions where volatility comes with the exchange rate. The purpose of this paper is to examine the effect of real effective exchange rate volatility on economic growth in the Central and Eastern European countries. Additionally, the effect, through three channels of influence on economic growth which vary on the measurement of exchange rate volatility, is examined. The study uses annual data for fourteen CEE countries for the period 2002–2018 to examine the nature and extends the impact of such movements on growth. The empirical findings using the fixed effects estimation for panel data reveal that the volatility of the exchange rate has a significant negative effect on real economic growth. The results appear robust with alternative measures of exchange rate volatility such as standard deviation and z-score. This paper suggests that policymakers should adopt different policies to keep the exchange rate stable in order to foster economic growth.

The response of Zimbabwe tobacco exports to real exchange rates volatility: 1980–2019

The focus of this study was on investigating the response of tobacco exports to real exchange rates and real exchange rate volatility and other factors in Zimbabwe using secondary data spanning from 1980 to 2019. Bilateral nominal exchange rates and time-variant weights of Zimbabwe’s 10 major trading partners were calculated and used to compute the real exchange rate index. The time-dependent weighting system was used to better represent the evolution of trade patterns in the index. The arithmetic method was employed for computing the index. Generalized autoregressive conditional heteroskedasticity (GARCH) and autoregressive conditional heteroscedasticity (ARCH) models were used to generate the real exchange rate volatility index. The export response function was adopted as the tobacco exports response model. The variables in the tobacco exports response model were the realworld Gross Domestic Product (GDP), real exchange rate, terms of trade, real exchange rate volatility and dollarization. A vector error correction model (VECM) was used to estimate the response of tobacco exports to real exchange rate, real exchange rate volatility and other factors. The VECM results indicated that real world GDP was insignificant in both the short and long run. In the long run, the real exchange rate appreciation had a negative impact on tobacco exports. Conversely, in the short run, the depreciation of real exchange rate had a positive impact on tobacco exports. Hence, the government has to adopt other mechanisms that reduce uncertain movements of exchange rates.

Aid for Trade Flows and Real Exchange Rate Volatility in Recipient-Countries

This paper aims to contribute to the literature on the determinants of real exchange rate volatility by investigating the effect of Aid for Trade (AfT) flows on real exchange rate volatility in recipient-countries. The empirical findings show that over the full sample, AfT flows influence negatively the volatility of real exchange rate, with a lower reducing effect on Least developed countries (LDCs) compared to NonLDCs. The channels through which this effect materializes include export product concentration, institutional and governance quality, foreign direct investment inflows and terms of trade volatility. These results show that AfT flows clearly matter for real exchange rate volatility.

Exchange Rate Volatility and Its Implications on Macroeconomic Variables in East African Countries

The study examines the extent of exchange rate volatility and its impact on key macroeconomic variables such as exports, FDI inflows, interest rate and inflation in Tanzania, Kenya and Uganda. The GARCH model is used to compute the extent of exchange rate volatility while the Panel Autoregressive Distributed Lag (ARDL) technique or pooled mean group (PMG) estimator was used to estimate the effects of exchange rate volatility on selected macroeconomic variables. The results indicate that volatility in the exchange rate is a real issue in all the sampled countries and is fundamentally driven by exports and FDI dynamics for the period under consideration. The results indicate a positive impact of the exchange rate volatility to export performance and lending rates in the long run. Exchange rate volatility appears to be detrimental to both export performance and leads to a reduction in lending rates in the short run. Also, the response of FDI to exchange rate volatility seems to be negative in the long run while in the short run the response from the volatility of real exchange rate seems is insignificant. Though not significant, the volatility of the exchange rate appears to have a positive impact on inflation. The study recommends that policymakers need institute mitigation measures which could smooth out excessive exchange rate volatility to minimize its likely impact on the economy. The study also indicated a need for the EAC countries to consider adopting inflation targeting monetary policy framework in order to contain inflation at the appropriate level.

The effect of exchange rate volatility on economic growth in Turkey

Purpose - Exchange rate volatility, which is defined as continuous fluctuations in exchange rates, has been frequently discussed in the literature recently due to its effects on developing economies. Exchange rate volatility is costly to the domestic economy through its direct and indirect effects on households and firms. Turkey implied different exchange rate regimes between 1980 and 2019. Also the use of exchange rate as a policy tool for fighting against inflation or current account deficit has increased exchange rate volatility in Turkey. The review of literature on the impact of exchange rate volatility on economic growth provides mixed results. The impact differs from developed to developing countries. The purpose of this study is to examine the impact of exchange rate volatility on economic growth in Turkey between 1998:Q1 and 2019:Q3. Methodology - This paper uses an Autoregressive Distributed Lag (ARDL) Model to analyze the effect of exchange rate volatility on economic growth in Turkey. Volatility of exchange rate is calculated from the real effective exchange rate by using the GARCH (1,1) model. ARDL model and the bounds testing approach has some advantages over other conventional cointegration approaches. Lagrange Multiplier (LM) test for autocorrelation and Ramsey RESET test for specification error were applied. One last diagnostic test of CUSUM and CUSUMSQ are used to check the stability of the short run and long run coefficient estimates. Findings- Estimation results of ARDL model show that real effective exchange rate volatility has a negative and highly statistically significant effect on economic growth in Turkey. From the long run coefficients export and investment have a significant positive effect on real GDP, import and exchange rate volatility have significant negative effect on real GDP. Conclusion- In order to ensure sustainable economic growth, it is necessary to strengthen the fiscal and financial structure and reduce the volatility in exchange rates. Financial deepening and fiscal discipline are very important in this respect. Changing the production structure and investing in education and high technology, increasing the domestic production of intermediate goods are also required for achieving high growth rates.