The impact of exchange rate volatility on emerging market exports

Abstract

Orientation: High exchange rate volatility has implications for business and policy decisions and exchange rate movements are important in debates around trade and trade policies.

Research purpose: The purpose of the research was to determine the impact of exchange rate volatility on exports in emerging markets.

Motivation for the study: A lack of clarity in literature regarding this relationship increases the risk of improper planning by export organisations as well as implementing suboptimal economic policies.

Research design, approach and method: This research analysed the effect of exchange rate volatility on emerging market exports using a sample of nine emerging countries from 1995 to 2010. Panel data analysis was conducted. Volatility was measured by Generalised Autoregressive Conditional Heteroscedasticity and conventional standard deviation in order to determine if the instrument of volatility used influenced the nature of the relationship between exchange rate volatility and exports. The Pedroni residual cointegration method was used to test for panel cointegration in order to determine if there was a long-run relationship.

Main findings: The results showed that exchange rate volatility had a significant negative effect on the performance of exports, regardless of the measure of volatility used. It was also evident that a long-run relationship did exist.

Practical/managerial implications: The study concluded that the policy mix that will reduce exchange rate volatility (such as managed exchange rate regimes) and relatively competitive exchange rates were essential for emerging markets in order to sustain their exports performance.

Contribution/value-add: This research provided policy makers of emerging market economies with new evidence pertaining to the relationship between exchange rate volatility and the performance of exports. This research contributed to the existing knowledge on the topic and provides a base for future research on related topics.