Exchange-rate volatility and commodity trade between the USA and Indonesia

Abstract

Since the introduction of the current system of floating exchange-rate regimes, the empirical literature on its implications has grown, with various studies exploring the effects of exchange-rate volatility using different data selection and modeling techniques. Most of these results have been mixed, finding that risk can have positive, negative, or insignificant effects on export and import flows. This study extends the empirical literature by focusing on the role of exchange-rate volatility on trade between the USA and Indonesia. We use disaggregated trade data by commodity and investigate 108 US export industries to Indonesia and 32 US import industries. Our results show that more than half of export and import industries are affected by real exchange-rate volatility in the short run. However, only a third of the export and import industries register long-run effects. We find that, for large industries, exports and imports behave similarly, but that far more small Indonesian exporters see their trade reduced by increased risk.

Keywords:

• exchange rate volatility
• industry data
• Indonesia
• United States
• bounds testing

JEL Classifications:

• F31

Acknowledgements

Valuable comments of two anonymous referees are greatly appreciated. Any error, however, is ours.

Notes

1. Ecuador, Indonesia, Korea, Malaysia, Malawi, Mauritius, Mexico, Morocco, Philippines, Sri Lanka, Taiwan, Thailand, Tunisia.

2. Some of the studies using similar empirical methods are: Bahmani-Oskooee and Wang (2007), Bahmani-Oskooee and Hegerty (2009), Bahmani-Oskooee and Harvey (2011), and Bahmani-Oskooee, Harvey, and Hegerty (2012, 2013).

3. Panapoulou and Pittis (2004) shows that ARDL is a better empirical approach in smaller samples.

4. For other applications of this approach see Bahmani-Oskooee, Economidou, and Goswami (2005), Halicioglu (2007), Narayan, Narayan, Prasad, and Prasad (2007), Tang (2007), Mohammadi, Cak, and Cak (2008), Wong and Tang (2008), Payne (2008), Bahmani-Oskooee and Gelan (2009), Chen and Chen (2012), and Wong (2013).