EXCHANGE RATE UNCERTAINTY and EXPORT PERFORMANCE: SUPPLY and DEMAND EFFECTS
| Date | 01 November 1995 |
| Published date | 01 November 1995 |
| DOI | http://doi.org/10.1111/j.1467-9485.1995.tb01165.x |
| Author | Sean Holly |
Srorrish
Journal
of
Polttrrol
Econoiiiy.
Vol
42,
No
4.
November
1995
0
Scotush
Economic
Society
1995.
Published
by Blackwell Publbkrs.
108
Cowley Road,
Oxford
OX4
IJF.
UK
and
238
Main
Stmt.
Cambndgc.
MA
02142.
USA
EXCHANGE RATE UNCERTAINTY AND
EXPORT PERFORMANCE: SUPPLY AND
DEMAND EFFECTS
Sean
Holly'
1
INTRODUCTION
The literature on the effects of exchange rate uncertainty on trade patterns is
extensive. It
is
widely believed that exchange rate volatility, by increasing the
risk of international trade, has a negative effect on exporting (Hooper and
Kohthagen, 1978; Cushman, 1983, 1988; Akhtar and Hilton, 1984; Gotur,
1985; Bailey
et
al.,
1986a; Bailey
et
al.,
1986b; Thursby and Thursby, 1987;
Peree and Steinhem, 1989; Kroner and Lastrapes, 1993)' Fears about the effects
of exchange rate volatility on foreign trade have contributed to a shift in
opinion away from floating exchange rates towards systems
of
exchange rate
management such as the exchange rate mechanism of the European Monetary
System,
and
attempts at world wide policy coordination to attenuate exchange
rate fluctuations.
There
is
a
growing literature on the empirical role for uncertainty in economic
relationships. Aiginger (1987) provides a survey
of
many of the issues. Driven
and Moreton (1991) have examined the effect of uncertainty on investment;
Callen
et
al.
(1990)
have looked at the effects of uncertainty on inventories and
Price (1994) has found strong effects
of
output uncertainty on the employment
decisions of
firms.
In
hs
paper we consider the role of exchange rate uncertainty
in
a model which
uses a restricted cost function approach
to
exporting behaviour (Aspi and Giavazzi,
1982; Holly and Wade, 1991; Dinenis and Holly, 1991).
to
which we add exchange
rate uncertainty. We then estimate demand and supply/price equations for exports.
To
capture
risk
we use a GARCH estimator, with
this
we parameterise exchange rate
volatility following the approach
of
Kroner and Lasmpes
(1993).
However,
our
approach differs from that
of
Kroner and Lastrapes in
so
far
as
they estimate
reduced
form
relationships while we attempt to identify the effect of exchange rate
uncertainty on the underlying structural relationships.
Our
results suggest
that
exchange rate volatility does have a role to play in explaining the supply of exports
but does not have a significant effect on the demand for exports. However, the effect,
though significant statistically, is small.
'However, as
De
Grauwe
(1988)
points out. the effect of increased risk on economic
activity is ambiguous. If producen are sufficiently risk averse, an increase in exchange rate
uncertainty raises the expected marginal utility of
export
revenues and therefore induces
a
rise
in expons.
'
University of Sheffield
38
1
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