Exchange rate volatility and exports: evidence from the ASEAN-China Free Trade Area

Abstract

This paper examines the impact of exchange rate volatility on the bilateral exports within the ASEAN-China Free Trade Area (ACFTA) by using a generalized gravity model. A panel data set of 20 bilateral observations for the period from 1982:Q1 to 2005:Q1 is estimated using fixed-effect and random effect methods. Panel unit-roots and panel cointegration tests confirm the long-run relationship among the variables. The empirical results suggest that bilateral real exchange rate volatility has a statistically significant negative impact on the bilateral exports of the major ACFTA countries. But the magnitude of the impact appears to be fairly small.

Keywords:

• ACFTA
• trade
• exchange rate volatility

JEL Classification:

• F13
• F14
• F31

Acknowledgements

The author is grateful to an anonymous referee, John Grahl, Amrit Judge, Dirk Willenbockel, Shujie Yao and participants of the 17th CEA (UK) Conference for their helpful comments and suggestions. However, the author alone remains responsible for any errors.

Notes

Notes

1. ACFTA will be effective for newer ASEAN member countries (Cambodia, Lao, Myanmar and Vietnam) in 2015.

2. Singapore is excluded from the study in order to focus on the developing and emerging member countries.

3. Cordenillo (2005) noted that most of the bilateral trade flows among the sample countries can be classified as inter-industry trade.

4. See Côte (1994), McKenzie (1999) and Chit (2006) for more detail surveys of the empirical studies.

5. The author thanks participants of 17th CEA conference for pointing out of this issue.

6. See Bowen, Hollander, and Viaene (1998, pp. 539–541) for the origin of the model.

7. Real GDP volume in national currency is indexed as 100 in the year 2000. For Indonesia, production in total manufacturing from the OECD database is used for 1999-1 to 2000-1 and 2004-1 to 2005-1. For Thailand, quarterly GDP for 1982 to 1992 is constructed from Annual series by using Otani-Riechel Technique. For Malaysia, the Index of industrial production is used for 1982 to 1987. GDP of China from 2004Q1 to 2005 Q1 is estimated at annual growth rate of 8%.

8. See McKenzie (1999) for the different measures of exchange rate volatility employed in the empirical literature.

9. See Banerjee (1999) and Baltagi and Kao (2000) for the survey of the developments in non-stationary panels, panel unit roots and cointegration.

10. The author thanks an anonymous referee for pointing out of this issue.

11. This impact is computed as the estimated coefficient of the benchmark equation multiplied by one standard deviation of volatility measure, then multiplied by 100 to convert to a percentage.

12. The correlation coefficient between the real exchange rate and relative prices variables is 0.623.

13. This is not an unusual result. For example, Frankel (1997) finds that the European Community has had a significant negative effect on bilateral trade flows of its members for the period 1965–75 (see Table 6.4a, p. 141).