Exchange-Rate Volatility and Foreign Trade: Evidence From Thirteen LDC's

TLDR

The study empirically examines how real exchange‑rate volatility affects export flows of 13 less developed countries from 1973 to 1996 using Johansen cointegration and error‑correction models. In both the short‑run and long‑run, higher real effective exchange‑rate volatility significantly reduces export demand in all 13 LDCs, potentially prompting resource reallocation. Keywords: exchange‑rate variability, exports, error‑correction model, less developed countries.

Abstract

Abstract This article investigates empirically the impact of real exchange-rate volatility on the export flows of 13 less developed countries (LDC's) over the quarterly period 1973–1996. Estimates of the cointegrating relations are obtained using Johansen's multivariate procedure. Estimates of the short-run dynamics are obtained for each country using the error-correction technique. The major results show that increases in the volatility of the real effective exchange rate, approximating exchange-rate uncertainty, exert a significant negative effect on export demand in both the short-run and the long-run in each of the 13 LDC's. These effects may result in significant reallocation of resources by market participants. KEY WORDS: Exchange-rate variabilityExportsError-correction modelLess developed countries