Does exchange-rate volatility affect import flows in G-7 Countries? Evidence from cointegration models

Abstract

This paper provides new evidence on the long-run relationship between imports and exchange-rate volatility in G-7 countries. The period examined is 1973:2 through 1995:1. Cointegration analyses are based on Johansen's (1991, 1994) approach and robust single-equation methods of Stock and Watson (1993) and Phillips and Loretan (1991). In conformity with theoretical considerations, the results indicate that exchange-rate volatility has a significant negative effect on the volume of imports of most G-7 countries whereas for Canada, it is positive and significant. These findings are reasonably robust in terms of measures of exchange-rate volatility and different estimation methods.