Nonlinear effects of exchange rate volatility on the volume of bilateral exports

Abstract

In this paper, we empirically investigate the impact of exchange rate volatility on real international trade ows utilizing a 13 country dataset of monthly bilateral real exports for 1980 1998. We compute one month ahead exchange rate volatility from the intra monthly variations in the exchange rate to better quantify this latent variable. We nd that the effect of exchange rate volatility on trade ows is nonlin- 1We acknowledge the expert research assistance provided by Tairi Room, and thank John Barkoulas and Franc Klaassen for productive conversations on these issues. Consultations with Nicholas J. Cox on programming practices were very helpful. We received useful comments on an earlier

Real & Nominal Foreign Exchange Volatility Effects on Exports - The Importance of Timing

“…We find that the size impact of foreign exchange rate forecasted volatility is not affected by the use of either real or nominal measures of foreign exchange rate 8 The positive effect of foreign exchange volatility is consistent with the results reported by Franke (1991) and Baum et al (2004). volatility. However, there is a substantial difference, when we move to the timing results and in particular for exports to the UK.…”

“…The practical implementation of the theory simplifies into constructing volatility estimators using aggregated squared or absolute exchange rate changes and their variants for any month t with m daily intervals. The most common approach suggests the use of aggregated squared exchange rate changes over a period, say for example, aggregating daily realisations to obtain monthly estimates instead of using a single estimate from the monthly exchange rate changes (see Baum et al, 2004;Klaessens, 2002). This estimate is closely associated with the variance.…”

On the investment sensitivity of debt under uncertainty

“…See Baum, Caglayan and Ozkan (2004) for a detailed discussion of the Merton procedure. Furthermore, we reject the presence of second-order autocorrelation (AR (2)) validating the use of suitably lagged endogenous variables as instruments.…”

The Effect of the Exchange Rates on Investment in Mexican Manufacturing Industry

“…We use a variant of Campa andGoldberg (1995, 1999) widely accepted in the literature that movements in exchange rates takes up to a year to affect the firm's behaviour (see, for instance, Baum et al, 2004). This strategy is also useful to avoid potential bias that may be induced by their possible correlation with current investment (see Campa and Golberg, 1995 …”

“…As Baum et al (2004) point out the choice of a particular specification to generate a proxy for uncertainty may have a considerable impact on the empirical findings. A common approach is to use either a moving average standard deviation or the coefficient of variation of the past monthly exchange rates as a measure of exchange rate volatility (see Campa, 1993;Campa and Goldberg, 1995;Amuedo andPozo, 2001 andHarchaoui et al, 2005).…”