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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)

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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Bibliographic Info

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://128.118.178.162

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

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