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Investigating Non-Linearities in the Relationship Between Real Exchange Rate Volatility and Trade

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Author Info
Olivier Bonroy (CRÉA, Laval University)
Jean-Philippe Gervais (CRÉA, Laval University)
Bruno Larue (CRÉA, Laval University)

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Abstract

Production and marketing lags in agri-food supply chains force competitive primary producers and food processors to commit to output targets before prices and exchange rates are realized. A theoretical model with one processor and many price-taking primary producers is developed to show that an increase in the volatility of the export price generally increases exports under risk neutrality. Furthermore, relaxing the assumption that the processing firm is risk neutral introduces non- linearities in the relationship between exports and export price volatility. This relationship is empirically investigated using the flexible non-linear inference framework developed by Hamilton (2001). The theoretical model provides the foundation for empirical bilateral export equations for Canadian pork exports to the U.S. and Japan. The empirical investigation supports the hypothesis that export price volatility has statistically significant non-linear effects on Canadian pork exports.

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Paper provided by EconWPA in its series International Finance with number 0501003.

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Date of creation: 27 Jan 2005
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Handle: RePEc:wpa:wuwpif:0501003

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Web page: http://129.3.20.41

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Related research
Keywords: Exchange rate volatility; non-linear flexible inference; production lags; pork exports;

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Find related papers by JEL classification:
Q17 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agriculture in International Trade
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions

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References listed on IDEAS
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    Other versions:
  5. Sauer, Christine & Bohara, Alok K, 2001. "Exchange Rate Volatility and Exports: Regional Differences between Developing and Industrialized Countries," Review of International Economics, Blackwell Publishing, vol. 9(1), pages 133-52, February. [Downloadable!] (restricted)
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  7. Carrion-i-Silvestre, Josep Lluis & Sanso-i-Rossello, Andreu & Ortuno, Manuel Artis, 2001. "Unit root and stationarity tests' wedding," Economics Letters, Elsevier, vol. 70(1), pages 1-8, January. [Downloadable!] (restricted)
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  14. Chowdhury, Abdur R, 1993. "Does Exchange Rate Volatility Depress Trade Flows? Evidence from Error-Correction Models," The Review of Economics and Statistics, MIT Press, vol. 75(4), pages 700-706, November. [Downloadable!] (restricted)
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