EFFECT OF EXCHANGE RATE VOLATILITY ON EXPORTS: EVIDENCE FROM EIGHT DEVELOPED COUNTRIES

Abstract

The purpose of this study is to empirically examine the relation between volatility in exchange rate and exports of eight developed countries (Australia, Canada, Japan, Korea, New Zealand, Norway, Sweden, and U.K). This study helps in understanding why developed nations have positive relation between volatility in exchange rate and exports. I have regressed three independent variables that are Gross Domestic Product, Consumer Price Index and volatility in exchange rate on total exports of eight developed nations. I have used three estimation techniques in this study including Pooled Ordinary Least Square, Fixed Effect Model and Random Effect Model. Panel Data has been used from 1991Q3 to 2011 Q4. For measuring the volatility in exchange rate “Moving Average Standard Deviation” technique has been used in this study. The results suggest a significant and positive relation between volatility in exchange rate and exports. The reason of these results highlights the important role played by the financial sector in developed nations. Strong financial sector helps the traders by providing hedging facilities which become the major reason to cope with uncertain situation created by volatile exchange rate. Gross Domestic Product variable also shown significant and positive impact on exports while Consumer Price Index shown significant negative impact on total exports.