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Exchange rate volatility and exports from India: a commodity-level panel data analysis

Author

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  • Chandan Sharma

Abstract

Purpose - This study aims to examine the relationship between exchange rate risk and export at commodity level for the Indian case. Design/methodology/approach - The monthly panel data used for analysis are at a disaggregated level, which cover around 100 products, encompassing all merchandize sectors for the period spanning from 2012:12 to 2017:11. To measure the exchange rate volatility, the authors use real as well as nominal exchange rate concepts and predict the volatility of exchange rate using the autoregressive conditional heteroscedastic-based model. They use pooled mean group, mean group and common correlated effects mean group estimator that is suitable for the objectives and data frequency. Findings - The empirical analysis indicates both short- and long-term negative effects of exchange rate variations on exporting. Specifically, in the long run, real exchange rate as well as nominal exchange rate volatility has significant effects on export performance, yet, the effects of uncertainty of nominal exchange rate is much severe and intense. In the short run, it is the nominal exchange rate uncertainty that hurts exports from India. Nevertheless, the short-run effect is much lesser than the long-run, supporting the argument that the short-term exchange rate risk can be hedged, at least partially, through financial instruments; however, uncertainty of the long-term horizon cannot be hedged easily and cost-effectively. Practical implications - Reducing uncertainty and attaining stability in exchange rate and price level should be an important policy objective in developing countries such as India to achieve higher export growth, both in the short and long run. Originality/value - Unlike previous studies, this paper tests the relationship using micro-level data and uses advanced econometric techniques that are likely to provide more precise information regarding the association between exchange rate volatility and trade flows.

Suggested Citation

  • Chandan Sharma, 2019. "Exchange rate volatility and exports from India: a commodity-level panel data analysis," Journal of Financial Economic Policy, Emerald Group Publishing Limited, vol. 12(1), pages 23-44, June.
    • Handle: RePEc:eme:jfeppp:jfep-11-2018-0157
    DOI: 10.1108/JFEP-11-2018-0157
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    References listed on IDEAS

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    1. Ethier, Wilfred, 1973. "International Trade and the Forward Exchange Market," American Economic Review, American Economic Association, vol. 63(3), pages 494-503, June.
    2. Sharma, Chandan & Pal, Debdatta, 2018. "Exchange rate volatility and India's cross-border trade: A pooled mean group and nonlinear cointegration approach," Economic Modelling, Elsevier, vol. 74(C), pages 230-246.
    3. Irwin, Douglas A., 2011. "Trade Policy Disaster," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262016710, December.
    4. Andrew K. Rose, 2000. "One money, one market: the effect of common currencies on trade," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 15(30), pages 08-45.
    5. Mohsen Bahmani-Oskooee & Muhammad Aftab, 2017. "Asymmetric Effects of Exchange Rate Changes and the J-curve: New Evidence from 61 Malaysia–Thailand Industries," Review of Development Economics, Wiley Blackwell, vol. 21(4), pages 30-46, November.
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    Cited by:

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    More about this item

    Keywords

    Financial markets and the macroeconomy; Trading volume; Econometric modeling; Exports; Panel ARDL; GARCH; India; Exchange rate volatility; C2; F31; F14;
    All these keywords.

    JEL classification:

    • C2 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade

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