Exchange rate movements affect exports in two ways -its depreciation and its variability (risk). A depreciation raises exports, but the associated exchange rate risk could offset that positive effect. The present paper investigates the net effect for eight Asian countries using a dynamic conditional correlation bivariate GARCH-M model that simultaneously estimates time varying correlation and exchange rate risk. Depreciation encourages exports, as expected, for most countries, but its contribution to export growth is weak. Exchange rate risk contributes to export growth in Malaysia and the Philippines, leading to positive net effects. Exchange rate risk generates a negative effect for six of the countries, resulting in a negative net effect in Indonesia, Japan, Singapore, Taiwan and a zero net effect in Korea and Thailand. Since the negative effect of exchange rate risk may offset, or even dominate, positive contributions from depreciation, policy makers need to reduce exchange rate fluctuation along with and possibly before efforts to depreciate the currency.
Journal of Economic Literature Classification: F14, F31
JEL classification: C32 F14 F31 F41
Keywords:Exports Exchange rate risk Asymmetric hedging DCC bivariate GARCH-M model a b s t r a c t This paper tests the hypothesis of asymmetric effects of exchange rate risk with a dynamic conditional correlation bivariate GARCH(1,1)-M model. The asymmetry means that exchange rate risk (volatility) affects exports differently during appreciations and depreciations, which may reflect exporter's asymmetric risk perception and hedging behavior. Using bilateral exports from eight Asian countries to the US, the real exchange rate risk significantly affects exports for all countries, negative or positive, in periods of depreciation or appreciation. Thus, policy makers can consider the stability of the exchange rate in addition to its depreciation as a method of controlling export growth.
scite is a Brooklyn-based organization that helps researchers better discover and understand research articles through Smart Citations–citations that display the context of the citation and describe whether the article provides supporting or contrasting evidence. scite is used by students and researchers from around the world and is funded in part by the National Science Foundation and the National Institute on Drug Abuse of the National Institutes of Health.