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Exchange rate shocks and trade: A multivariate GARCH-M approach

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  • Grier, Kevin B.
  • Smallwood, Aaron D.

Abstract

We build on the recent literature studying the effects of uncertainty on trade by introducing a model that combines a reduced form vector autoregression for the growth rates of exports, foreign income, and the real exchange rate (RER), with a multivariate GARCH model. Up to 12 lags of several conditional standard deviations are added to relevant mean equations, and all parameters are estimated simultaneously using maximum likelihood, thus allowing us to avoid two step procedures that are common in the literature. Using a large data set of both developed and emerging countries, we find evidence that RER uncertainty negatively impacts trade for several less developed countries. We also find that RER uncertainty tends to be associated with a real currency appreciation. When we compute generalized impulse response functions to study the impacts of unexpected shocks to RER growth on export growth, the results are typically asymmetric. Positive shocks generate substantial negative responses while unexpected depreciations produce relatively smaller positive responses, especially in our developing country sample.

Suggested Citation

  • Grier, Kevin B. & Smallwood, Aaron D., 2013. "Exchange rate shocks and trade: A multivariate GARCH-M approach," Journal of International Money and Finance, Elsevier, vol. 37(C), pages 282-305.
  • Handle: RePEc:eee:jimfin:v:37:y:2013:i:c:p:282-305
    DOI: 10.1016/j.jimonfin.2013.05.010
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    References listed on IDEAS

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    Cited by:

    1. Ratti, Ronald A. & Vespignani, Joaquin L., 2015. "Commodity prices and BRIC and G3 liquidity: A SFAVEC approach," Journal of Banking & Finance, Elsevier, vol. 53(C), pages 18-33.
    2. repec:ecb:ecbwps:20141801 is not listed on IDEAS
    3. MORIKAWA Masayuki, 2016. "Uncertainty over Exchange Rates and Exports: Evidence from dispersion of expectations as a measure of uncertainty," Discussion papers 16010, Research Institute of Economy, Trade and Industry (RIETI).
    4. Stijn Claessens & M. Ayhan Kose, 2017. "Asset prices and macroeconomic outcomes: A survey," CAMA Working Papers 2017-76, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    5. repec:eee:reveco:v:51:y:2017:i:c:p:193-213 is not listed on IDEAS
    6. Christopoulos, Dimitris & McAdam, Peter & Tzavalis, Elias, 2018. "Dealing with endogeneity in threshold models using copulas: an illustration to the foreign trade multiplier," Working Paper Series 2136, European Central Bank.
    7. repec:fis:journl:170302 is not listed on IDEAS
    8. di Mauro, Filippo & Demian, Calin-Vlad, 2015. "The exchange rate, asymmetric shocks and asymmetric distributions," Working Paper Series 1801, European Central Bank.
    9. Caporale, Guglielmo Maria & Menla Ali, Faek & Spagnolo, Nicola, 2015. "Exchange rate uncertainty and international portfolio flows: A multivariate GARCH-in-mean approach," Journal of International Money and Finance, Elsevier, vol. 54(C), pages 70-92.
    10. BAHMANI-OSKOOEE, Mohsen & HALICIOGLU, Ferda & Neumann, Rebecca, 2016. "Domestic Investment Responses to Changes in the Real Exchange Rate: Asymmetries of Appreciation versus Depreciation," MPRA Paper 82941, University Library of Munich, Germany, revised 10 Apr 2016.

    More about this item

    Keywords

    Real exchange rate uncertainty; Trade flows; Multivariate GARCH;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • F19 - International Economics - - Trade - - - Other
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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