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Publisher : Elsevier - Science Direct (الزویر - ساینس دایرکت)
Journal : Journal of Policy Modeling, Volume 27, Issue 8, November 2005, Pages 961–970
This paper investigates dynamic interrelations between exchange rate uncertainty, trade volumes, and price competitiveness, using sectoral data on UK manufacturing exports. The results suggest that when there is an unexpected fluctuation in exchange rates, exporters adjust to the change in the level of risk by increasing export prices and by decreasing trade volumes, but prefer to directly reduce trade volumes rather than to increase prices. The extent of each response depends, however, on the nature of the market in which the goods are traded. This evidence implies that if the UK adopts the euro, there will be a positive impact on the country's export trade and economic performance.
The adoption of the floating exchange rate system in 1973 has led to an extensive debate about how and whether exchange rate volatility affects international trade. In general, the theoretical literature is divided into two groups. One maintains a positive effect of exchange rate uncertainty on trade. Sercu and Vanhulle (1992) argue that the capacity to export is tantamount to holding an option and that when exchange rate volatility increases, the value of that option also increases, just as it would for any conventional option, and so encourages trade. De Grauwe (1988) supports this view by showing that even within a framework of risk-aversion, the dominance of income effects over substitution effects may boost external trade. On the other hand, Hooper and Kohlhagen (1978) propose a contrasting view, i.e. that exchange rate volatility discourages trade flows. Since the additional uncertainty increases risk in foreign trade, risk-averse traders tend to reduce trade volumes, particularly where appropriate hedging facilities do not exist or are costly. A number of studies have investigated this issue across a range of countries, with mixed conclusions – see, for example, Bailey, Tavlas, and Ulan (1987), Assery and Peel (1991), Chowdhury (1993), Kroner and Lastrapes (1993), Holly (1995), Arize, Osang, and Slottje (2000), and De Grauwe and Skudelny (2000). While most of the previous studies use aggregate bilateral or multilateral data, Klein (1990) and McKenzie (1998) use commodity specific data since the potential loss of effective estimation and testing power incurred through data aggregation may be large. The studies mentioned above mainly focus on whether the direct quantitative effect of exchange rate volatility on trade volumes is positive or negative, using single equation-based partial equilibrium models. However, it is reasonable to expect that when there is additional uncertainty in exchange rates, export/import traders try to avoid the increased risk by adjusting both prices and quantity simultaneously (see Hooper and Kohlhagen, 1978). Thus, in investigating the effect of exchange rate volatility on trade, it is necessary to pay attention also to the response of price levels. In this way, it may be possible to estimate how differently prices and quantity variables respond to the volatility in exchange rates, and to gauge which response is stronger. In this paper we investigate dynamic interrelations between exchange rate volatility, export competitiveness in prices, and trade volumes, using system-based vector autoregressive (VAR) models. In the study, disaggregated time series of UK manufacturing sectors are used. Any systematic patterns in the effects of exchange rate volatility on prices and quantity across disaggregated sectors may in this way be used to assess the stylized behavior of export traders in response to uncertainty in exchange rates. This motivation is further rationalized since all the current economic theories related to the issue are strongly rooted in microeconomic foundations based on specific commodities and industries. The empirical results in this study show that increased volatility in the exchange rate significantly reduces trade volumes, and increases price levels, thus reducing overall competitiveness. In general, the impact sizes on the former are greater than on the latter. Interestingly, this pattern is systematic across all the sectors considered, but the magnitudes are different, depending on the nature of the market in which the goods are traded. This evidence is compared to those of Klein (1990) and McKenzie (1998), who use single equation-based partial equilibrium models and find that in the case of sectoral data, the direction as well as the magnitude of the impact of volatility differs across sectors, and seems to be positive in the case of exports. Another interesting finding is that in the long run, there exists a systematic trade-off between positive responses in prices and negative responses in trade volumes, possibly reflecting the important role of these two variables in avoiding the risks in the markets and the requirement of a simultaneous econometric framework in analyzing the impacts on international trade. The paper is organized as follows. Section 2 discusses the measurement of the volatility of the exchange rate. In Section 3, empirical results are presented, and policy implications are discussed in the light of the UK's decision as to whether to adopt the Euro. Finally, conclusions are provided in Section 4.
نتیجه گیری انگلیسی
This paper has investigated how exchange rate uncertainty affects price competitiveness and trade volumes, using UK disaggregated data in manufactured export sectors. Unlike most previous studies, which use single equation-based partial equilibrium frameworks, we applied system-based VAR models. Our empirical results show that exchange rate volatility positively affects prices and negatively trade volumes, and thus depresses overall international trade. In general, the impact sizes on the latter are greater than on the former. Interestingly, this pattern is found in all four major manufacturing categories considered. Only the magnitudes of the effects are different, depending on the individual sector. This may reflect the risk-averse behavior of UK exporters. A further interesting finding is that in three of the four sectors considered, there exists a trade-off in the long-run responses of prices and quantity following an increase in exchange rate risk. It has been argued many times that one of the benefits for a country joining the EMU is the trade-enhancing effects of reduced exchange rate volatility. In this context, a key implication of our findings for UK macroeconomic policy is that if the country adopts the euro, there will be a positive impact on the UK's trade and economic performance. However, the full extent of this impact will be limited by the existence of inherent uncertainty elsewhere in the global economic system, and in particular in the euro/dollar exchange rate.