Industry‐specific exchange rate volatility and intermediate goods trade in Asia

Abstract

This paper empirically analyzes the effect of exchange rate volatility on intra-Asian trade of intermediate goods at an industry level by constructing a new dataset of the industry-specific bilateral real exchange rate. As the final processed exports are destined for countries outside the Asian region, both the exchange rate and world demand are considered as a possible driving force in the cross-border fragmentation and processing trade. It is found that, in contrast to the recent studies, the exchange rate impact on intra-regional trade differs across industries. The exchange rate volatility has negative and significant effects only on the general machinery industry and a part of the electric machinery industry with more differentiated products, even when taking into account the world's demand for the final processed exports. These findings are supported by various kinds of exchange rate volatility in the short-and long-run. Our empirical results suggest that the different impact of the exchange rate volatility across industries is tied to the characteristics of traded goods in respective industries.

The Impact of the Exchange Rate and Its Volatility on Output in Asia: The Role of Global Value Chains

“…The LnVOL variable, which is a proxy of exchange rate volatility, has a negative relationship to LnRGDP, but it is not significant. This result is reasonable since it is in line with some of the previous findings which reveal that exchange rate volatility only has a negative and significant impact on the general machinery industry and parts of the electric machinery industry [16]. In addition, exchange rate volatility has a negative, but very small, effect on exports [17].…”

“…Specifically, four kinds of short-term and long-term exchange rate volatility in intra-Asian trade on intermediate goods at the industry level results showed that exchange rate volatility has a negative and significant impact only on the general machinery industry and parts of the electric machinery industry with more differentiated products [16]. The different effects of exchange rate volatility in those industries are closely related to the characteristics of the goods traded in each industry.…”

“…Some used different proxy variables, each of which has advantages in the distinction of data interpolation and extrapolation techniques, as well as in constructing the variables in the model. Besides that, the used of econometrics approach is also quite diverse, including, GARCH as the most common model in testing volatility [14], the combination of ARCH and ECM methods [6], the combination of the gravity model, ARCH, and OLS [16], dynamic panel with two-step system GMM [17], static panel with fixed-effects model [3,7,15], and the combination of propensity-score matching and difference-in-difference regression [18].…”

The Impact of Exchange Rate Volatility on Korea-Japan Trade Flows: An Industry Level Analysis

“…Nonetheless, while the positive impact of volatility presented on trade of machinery and transport equipment between Japan and USA, it showed mixed results on chemicals products and miscellaneous manufactured articles (Bahmani-Oskooee and Hegerty, 2008). Sato et al (2016) added that the impact of volatility depends on the characteristics of the trading goods. For instance, the volatility negatively affected trade in general machinery, whereas it had no impact of trade of intermediate goods for the intra-Asia trade.…”

Regional Currency or Regional Trade Policy? An East Asian Perspective of 21st Century Growth

“…In last one decade, the region substantially improved their regional trade, investment and intra-regional production network; however, establishment of regional currency management policy in East Asia remains under doubt. Moreover, Sato et al (2016) claim that negative effect of exchange rate volatility in Asian trade is industry-specific (only for some machinery industry) and cannot be generalized. Thus, importance of regional currency management in East Asia becomes questionable over time.…”