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Investigating Non-Linearities in the Relationship Between Real Exchange Rate Volatility and Trade

Author

Listed:
  • Olivier Bonroy

    (CRÉA, Laval University)

  • Jean-Philippe Gervais

    (CRÉA, Laval University)

  • Bruno Larue

    (CRÉA, Laval University)

Abstract

Production and marketing lags in agri-food supply chains force competitive primary producers and food processors to commit to output targets before prices and exchange rates are realized. A theoretical model with one processor and many price-taking primary producers is developed to show that an increase in the volatility of the export price generally increases exports under risk neutrality. Furthermore, relaxing the assumption that the processing firm is risk neutral introduces non- linearities in the relationship between exports and export price volatility. This relationship is empirically investigated using the flexible non-linear inference framework developed by Hamilton (2001). The theoretical model provides the foundation for empirical bilateral export equations for Canadian pork exports to the U.S. and Japan. The empirical investigation supports the hypothesis that export price volatility has statistically significant non-linear effects on Canadian pork exports.

Suggested Citation

  • Olivier Bonroy & Jean-Philippe Gervais & Bruno Larue, 2005. "Investigating Non-Linearities in the Relationship Between Real Exchange Rate Volatility and Trade," International Finance 0501003, EconWPA.
  • Handle: RePEc:wpa:wuwpif:0501003
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Exchange rate volatility; non-linear flexible inference; production lags; pork exports;

    JEL classification:

    • Q17 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agriculture in International Trade
    • 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

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