Exchange rate volatility and exports: the case of emerging East Asian economies.

Chit, Myint Moe (2008) Exchange rate volatility and exports: the case of emerging East Asian economies. PhD thesis, Middlesex University. [Thesis]

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Abstract

This thesis provides an empirical analysis of the impact of exchange rate volatility on the exports of five emerging East and South East Asian economies; China, Indonesia, Malaysia, the Philippines and Thailand. The countries under
consideration are the main members of the impending ASEAN-China Free Trade Area (ACFTA), and the options for a closer monetary integration including proposais for the eventual formation of a currency union within the region are
currently an active area of research and policy debate. Therefore, an understanding of the degree to which exchange rate volatility affects their export activity is important for setting the optimal exchange rate policy in emerging East Asian countries.

Recognizing the specificity of the exports of the sample countries which is different from those of industrialised countries this study employs an augmented generalised gravity model instead of a pure gravity model. A GMM-IV approach is used to overcome the potential econometric problems of endogeneity and heteroskedasticity. In addition, this study is the first to conduct the recently
developed panel unit-root and cointegration tests to verify the existence of a long-run stationary relationship between real exports and exchange-rate volatility. The
benchmark measure of the exchange rate volatility which represents uncertainty is the standard deviation of the first difference of the logarithmic exchange rate. In
order to check the robustness of the results two additional measures of exchange rate volatility - the moving average standard deviation of the logarithmic exchange rate (MASD) and the conditional exchange rate volatility which follows
a Generalised Autoregressive Conditional Heteroscedascity process (GARCH) are also used to estimate the model.

The results provide a strong evidence that exchange rate volatility has an economically and statistically significant negative impact not only on the overall
exports to the world market but also on the intra-regional exports of emerging East Asian countries. In addition, the results indicate that the adverse effect of exchange rate volatility on exports is not a linear and is conditional on the financial sector development of the exporting country: the more financially developed an economy is, the less its exports are adversely affected by exchange rate volatility. These results are robust across different estimation techniques and do not depend on the variable chosen to proxy exchange rate uncertainty.

In conclusion, the results of the thesis suggest that whilst exchange rate flexibility has desirable properties as a 'shock absorber' to dampen the impact of real shocks, on average it still has an adverse effect on the exports of the emerging East Asian countries, and the impact is more severe on a financially less developed economy.

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