Does exchange rate volatility hinder export growth? Additional evidence
The authors examine the impact of exchange rate volatility on trade, using and ARCH-in-mean model. The advantages of this statistical approach over earlier approaches is that it provides more efficient coefficient estimates and it prevents the problem of spurious regressions. They applied the model to six countries, estimating both bilateral and aggregate exports. The results led to the hypothesis that the impact of exchange rate volatility may be influenced by the invoicing of exports. Also, one can argue that the effect of exchange rate volatility on trade is overstated, for the following reasons: exchange rate volatility does not measure the added riskiness of a firm's portfolio;exchange rates can provide a natural hedge in a firm's portfolio; exchange rates may be negatively correlated with each other or with the firm's other assets; and finally, the use of forward markets can provide a useful short-term hedge.
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