How does uncertainty about the real exchange rate affect exports?

Since the debt crisis, many countries are still struggling to achieve a current account situation that is compatible with reduced external financing and a moderate but sustainable rate of output growth. A key element of a successful medium term strategy is to move resources into the export sector. This type of policy, unfortunately, often entails sharp short run recessions. The purpose of this paper is to show that real exchange rate uncertainty is a non-price variable which has less short and medium term costs. Reducing the level of exchange rate uncertainty may lower the size of the real devaluation required to improve the current account balance while avoiding a recession. In section I, the paper constructs a simple two period model that highlights the different channels through which real exchange rate uncertainty may affect exports. Section II describes the data and section III estimates the empirical relevance of these issues. Finally, section IV summarizes the results which conclude that uncertainty about the real exchange rate showed a clear, strongly negative effect on export performance.