The impact of exchange rate volatility on international trade: Reduced form estimates using the GARCH-in-mean model

In this paper, we use a multivariate GARCH-in-mean model of the reduced form of multilateral exports to examine the relationship between nominal exchange rate volatility and export flows and prices. The model imposes rationality on perceived exchange rate volatility, unlike conventional, two-step st...

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Bibliographic Details
Published in:Journal of international money and finance 1993-06, Vol.12 (3), p.298-318
Main Authors: Kroner, Kenneth F., Lastrapes, William D.
Format: Article
Language:English
Subjects:
Economic impact
Economic models
Economic theory
Economics
Exports
Foreign exchange
Foreign exchange rates
International trade
Manycountries
Statistical analysis
Volatility
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Summary:In this paper, we use a multivariate GARCH-in-mean model of the reduced form of multilateral exports to examine the relationship between nominal exchange rate volatility and export flows and prices. The model imposes rationality on perceived exchange rate volatility, unlike conventional, two-step strategies. Tests are performed for five industrialized countries over the post-Bretton Woods era. We find that the GARCH conditional variance has a statistically significant impact on the reduced form equations for all countries. For most of the countries, the magnitude of the effect is stronger for export prices than quantities. In addition, the estimated magnitude of the impact of volatility on exports is not robust to using the conventional estimation strategy. (JEL F41, F31).
ISSN:0261-5606
1873-0639
DOI:10.1016/0261-5606(93)90016-5