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An Empirical Analysis of Short-Run and Long-Run Irish Export Functions: Does Exchange Rate Volatility Matter?

  • Donal Bredin
  • Stilianos Fountas

    (Department of Economics, National University of Ireland, Galway)

  • Eithne Murphy

    ()

    (Department of Economics, National University of Ireland, Galway)

We analyse the long-run and short-run relationship between merchandise export volume and its determinants, foreign income, relative prices and exchange rate variability, using the techniques of cointegration and error correction. The model was estimated for Irish exports and sectoral exports SITC 0--4 and SITC 5--8 to the European Union using quarterly data for the period 1979--1992. The sectoral classification corresponds to the exports of mainly indigenous Irish firms and multinationals, respectively. We find that exchange rate volatility has a negative effect on the exports of the multinational sector but no effect on the exports of the indigenous sector in the short run. In contrast, exchange rate volatility has no effect on the exports of the multinational sector but a positive effect on the exports of the indigenous sector and overall exports in the long run. This last result implies that Ireland's participation in the single European currency might have a negative impact on exports of indigenous firms and, as a consequence, overall exports.

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Paper provided by National University of Ireland Galway, Department of Economics in its series Working Papers with number 22.

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Date of creation: 1998
Date of revision: 1998
Publication status: Published in the International Review of Applied Economics
Handle: RePEc:nig:wpaper:0022
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  1. Edgar Morgenroth, 2000. "Exchange rates and trade: the case of Irish exports to Britain," Applied Economics, Taylor & Francis Journals, vol. 32(1), pages 107-110.
  2. Koray, Faik & Lastrapes, William D, 1989. "Real Exchange Rate Volatility and U.S. Bilateral Trade: A VAR Approach," The Review of Economics and Statistics, MIT Press, vol. 71(4), pages 708-12, November.
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  5. Stilianos Fountas & Kyriacos Aristotelous, 1998. "Has the European Monetary System Led to More Exports? Evidence from Four European Union Countries," Working Papers 31, National University of Ireland Galway, Department of Economics, revised 1998.
  6. Phillips, P C B, 1991. "Optimal Inference in Cointegrated Systems," Econometrica, Econometric Society, vol. 59(2), pages 283-306, March.
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  9. Franke, Gunter, 1991. "Exchange rate volatility and international trading strategy," Journal of International Money and Finance, Elsevier, vol. 10(2), pages 292-307, June.
  10. 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.
  11. Baron, David P, 1976. "Fluctuating Exchange Rates and the Pricing of Exports," Economic Inquiry, Western Economic Association International, vol. 14(3), pages 425-38, September.
  12. Hooper, Peter & Kohlhagen, Steven W., 1978. "The effect of exchange rate uncertainty on the prices and volume of international trade," Journal of International Economics, Elsevier, vol. 8(4), pages 483-511, November.
  13. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
  14. Andrew K. Rose, 2000. "One money, one market: the effect of common currencies on trade," Economic Policy, CEPR;CES;MSH, vol. 15(30), pages 7-46, 04.
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  16. Padma Gotur, 1985. "Effects of Exchange Rate Volatility on Trade: Some Further Evidence (Effets de l'instabilité des taux de change sur le commerce mondial: nouvelles constatations) (Efectos de la inestabilidad de los t," IMF Staff Papers, Palgrave Macmillan, vol. 32(3), pages 475-512, September.
  17. Browne, Francis X, 1982. "Modelling Export Prices and Quantities in a Small Open Economy [The Supply and Demand for Exports: A Simultaneous Approach]," The Review of Economics and Statistics, MIT Press, vol. 64(2), pages 346-47, May.
  18. De Grauwe, Paul, 1987. "International trade and economic growth in the european monetary system," European Economic Review, Elsevier, vol. 31(1-2), pages 389-398.
  19. Kenen, Peter B & Rodrik, Dani, 1986. "Measuring and Analyzing the Effects of Short-term Volatility in Real Exchange Rates," The Review of Economics and Statistics, MIT Press, vol. 68(2), pages 311-15, May.
  20. McKenzie, Michael D, 1999. " The Impact of Exchange Rate Volatility on International Trade Flows," Journal of Economic Surveys, Wiley Blackwell, vol. 13(1), pages 71-106, February.
  21. Holly, Sean, 1995. "Exchange Rate Uncertainty and Export Performance: Supply and Demand Effects," Scottish Journal of Political Economy, Scottish Economic Society, vol. 42(4), pages 381-91, November.
  22. Gonzalo, Jesus, 1994. "Five alternative methods of estimating long-run equilibrium relationships," Journal of Econometrics, Elsevier, vol. 60(1-2), pages 203-233.
  23. Thursby, Jerry G & Thursby, Marie C, 1987. "Bilateral Trade Flows, the Linder Hypothesis, and Exchange Risk," The Review of Economics and Statistics, MIT Press, vol. 69(3), pages 488-95, August.
  24. Pozo, Susan, 1992. "Conditional Exchange-Rate Volatility and the Volume of International Trade: Evidence from the Early 1900s," The Review of Economics and Statistics, MIT Press, vol. 74(2), pages 325-29, May.
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