Academic journal article The Journal of Developing Areas

Exchange Rate Volatility and Exports: Some New Estimates from the Asean-5

Academic journal article The Journal of Developing Areas

Exchange Rate Volatility and Exports: Some New Estimates from the Asean-5

Article excerpt

(ProQuest: ... denotes formulae omitted.)

INTRODUCTION

After the breakdown of the Bretton-Woods system in 1973, most countries adopted floating exchange rate regimes. The adoption of floating regimes was accompanied by issues relating to exchange rate uncertainty and its impact on both exports and imports. Changes in macroeconomic variables such as changes in inflation, interest rates, the money supply and the balance of payments, represent the primary sources of exchange rate variability. These variables, in particular, have become more volatile in since the 1980s and early 1990s, thus leading to greater exchange rate volatility (Ozturk, 2006). Recent electronic advancements, current account liberalization, and increasing crossborder flows and currency speculation have also led to exchange rate fluctuations (Hook and Boon, 2000). Such exchange rate uncertainty exposes parties that are engaged in international transactions to greater exchange rate risk, a problem that is particularly vexing for multinational corporations, as they are engaged in commerce with countries across the globe. As such, the issue of exchange rate uncertainty has historically been a topic of interest to policymakers and academic researchers (Makin, 1976; Hooper and Kohlagen, 1978; Cushman, 1983; Akhtar and Hilton, 1984; Kumar and Whitt, 1992; Chowdhury, 1992).

There are numerous empirical studies of the effect of exchange rate volatility on a country's export performance, most of which are based on data from industrialized nations and produce mixed results. However, there are relatively few studies on countries in the Association of Southeast Asian Nations (ASEAN). In one case, Siregar and Rajan (2002) develop export and import functions for Indonesia in an effort to understand its trade performance in the 1990s. Their findings suggest that exchange rate volatility had a negative effect on both export performance and import volume in Indonesia during this period. These results are supported by findings from a bilateral model of Indonesia's trade with Japan (Siregar and Rajan, 2002). Poon, Choong and Habibullah (2005) examine the relationship between exchange rate volatility and exports in five East Asian economies, including Indonesia, Japan, South Korea, Singapore and Thailand. They find a negative effect of exchange rate volatility on exports in short term in all of the countries except Singapore. A more recent study by Chit, Rizov and Willenbockel (2010) uses panel data in order to examine the effects of exchange rate volatility on bilateral export flows between five emerging East Asian countries, namely China, Indonesia, Malaysia, the Philippines and Thailand, with their major trading partners. Their empirical results suggest that exchange rate volatility in emerging East Asian economies exerts negative pressure on export flows.

This study addresses the relative paucity of research on the effect of exchange rate volatility on export performance in Southeast Asia by examining this relationship for the ASEAN-5 group, which includes Thailand, Malaysia, Singapore, Indonesia and the Philippines. Unlike the prior studies in this literature, the current study employs the volatility of the real effective exchange rate, as opposed to the bilateral exchange rate. Given that the purpose of this study is to examine the effect of exchange rate volatility on total exports, the use of the real effective exchange rate, as opposed to the traditional bilateral exchange rate, is appropriate here as it accounts for price levels in the countries under study. Additionally, where past studies used either monthly or quarterly data in their analyses, this paper uses annual data. As such, comparison of the findings from this study to those of previous studies will shed some light on the robustness of the results from prior research.

PRIOR LITERATURE: A BRIEF REVIEW

From a theoretical perspective, the relationship between exchange rate volatility and growth in exports is ambiguous. …

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