Exchange rate volatility and exports from East Asian countries to Japan and the USA

Abstract

The purpose of this article is to investigate the impact of exchange rate volatility on exports in four East Asian countries (Hong Kong, South Korea, Singapore, and Thailand). Specifically, this article aims at determining whether the bilateral real exchange rate volatility between an East Asian country and its trading partner negatively affects the exports of the East Asian country. Considering the dominant roles of the USA and Japan as trading partners of those East Asian countries, this article focuses on the quarterly export volumes of East Asian countries to the US and Japan for the period from 1981 to 2004. Except for the case of Hong Kong's exports to Japan, cointegration tests and estimations of error correction models indicate exchange rate volatility has negative impacts on exports either in the short-run or in the long-run, or both. On the other hand, the real GDP of importing countries and depreciation of real bilateral exchange rates turn out, in general, to have positive effects. Of special interest is the finding that the impact of the exchange rate volatility does not show any stylized differences depending on whether the importing country is Japan or the USA, even though dollar invoicing dominates in East Asia.

Acknowledgements

The authors benefited from the comments of participants of the 8th international convention of the East Asian Economic Association and the 2003 conference of the Japanese Economic Association. The authors also thank the anonymous referee for his or her valuable comments. The authors are responsible for all remaining errors.

Notes

¹ Except for the case of Thailand, the share of the USA in the exports of the East Asian countries examined in this article has declined during the last 15 years. According to Nakamura and Matsuzaki (1997) and Takagi (1996), Japan's share in the exports of the East Asian countries became close to that of the US in the mid-1990s.

² In order to ensure consistency in data, variables which were not seasonally pre-adjusted were adjusted for seasonality prior to taking logarithm by applying the method Census X12 available in the software package E-views 5.

³ As Sercu and Uppal (2000) mention, this is one of the major ways to measure the exchange rate volatility. For example, see Akhtar and Hilton (1984), Côté (1994) and Baum et al . (2001).

⁴ In various aspects, the exports equations of Hong Kong and Singapore show somewhat different behaviours from those of South Korea and Thailand. This point will be briefly discussed later.

⁵ This point was raised by some participants at the 2002 convention of the East Asian Economic Association. More specific investigation of the trade pattern of the two city countries will be beneficial to an understanding the impact of the exchange rate volatility in the countries and will be our future research topic.

⁶ This test was motivated by the literature reporting the 1997 crisis as a structural break in the dynamics of the East Asian exchange rates movement. See Mckinnon (2000), Baak (2001) and their references.

⁷ Because the crisis period (1997–1998) and the post-crisis period (1999–2004) provide too short time series data for cointegration tests, the tests with the pre-crisis period (1981–1996) data set are compared with the tests not with the post-crisis period data set but with the whole period (1981–2004) data set.