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Export Promotion through Exchange Rate Policy: Exchange Rate Depreciation or Stabilization?

  • WenShwo Fang

    (Feng Chia University)

  • YiHao Lai

    (Deng Chia University)

  • Stephen M. Miller

    (University of Connecticut and University of Nevada, Las Vegas)

Exchange rate movements affect exports in two ways -- its depreciation and its variability (risk). A depreciation raises exports, but the associated exchange rate risk could offset that positive effect. The present paper investigates the net effect for eight Asian countries using a dynamic conditional correlation bivariate GARCH-M model that simultaneously estimates time varying correlation and exchange rate risk. Depreciation encourages exports, as expected, for most countries, but its contribution to export growth is weak. Exchange rate risk contributes to export growth in Malaysia and the Philippines, leading to positive net effects. Exchange rate risk generates a negative effect for six of the countries, resulting in a negative net effect in Indonesia, Japan, Singapore, Taiwan and a zero net effect in Korea and Thailand. Since the negative effect of exchange rate risk may offset, or even dominate, positive contributions from depreciation, policy makers need to reduce exchange rate fluctuation along with and possibly before efforts to depreciate the currency.

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File URL: http://web2.uconn.edu/economics/working/2005-07.pdf
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Paper provided by University of Connecticut, Department of Economics in its series Working papers with number 2005-07.

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Length: 24 pages
Date of creation: Mar 2005
Date of revision:
Publication status: Published in Southern Economic Journal, January 2006, 611-627.
Handle: RePEc:uct:uconnp:2005-07
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Web page: http://www.econ.uconn.edu/

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