TY - JOUR
T1 - Exchange rate shocks and trade
T2 - A multivariate GARCH-M approach
AU - Grier, Kevin B.
AU - Smallwood, Aaron D.
PY - 2013/10
Y1 - 2013/10
N2 - We build on the recent literature studying the effects of uncertainty on trade by introducing a model that combines a reduced form vector autoregression for the growth rates of exports, foreign income, and the real exchange rate (RER), with a multivariate GARCH model. Up to 12 lags of several conditional standard deviations are added to relevant mean equations, and all parameters are estimated simultaneously using maximum likelihood, thus allowing us to avoid two step procedures that are common in the literature. Using a large data set of both developed and emerging countries, we find evidence that RER uncertainty negatively impacts trade for several less developed countries. We also find that RER uncertainty tends to be associated with a real currency appreciation. When we compute generalized impulse response functions to study the impacts of unexpected shocks to RER growth on export growth, the results are typically asymmetric. Positive shocks generate substantial negative responses while unexpected depreciations produce relatively smaller positive responses, especially in our developing country sample.
AB - We build on the recent literature studying the effects of uncertainty on trade by introducing a model that combines a reduced form vector autoregression for the growth rates of exports, foreign income, and the real exchange rate (RER), with a multivariate GARCH model. Up to 12 lags of several conditional standard deviations are added to relevant mean equations, and all parameters are estimated simultaneously using maximum likelihood, thus allowing us to avoid two step procedures that are common in the literature. Using a large data set of both developed and emerging countries, we find evidence that RER uncertainty negatively impacts trade for several less developed countries. We also find that RER uncertainty tends to be associated with a real currency appreciation. When we compute generalized impulse response functions to study the impacts of unexpected shocks to RER growth on export growth, the results are typically asymmetric. Positive shocks generate substantial negative responses while unexpected depreciations produce relatively smaller positive responses, especially in our developing country sample.
KW - Multivariate GARCH
KW - Real exchange rate uncertainty
KW - Trade flows
UR - http://www.scopus.com/inward/record.url?scp=84880951967&partnerID=8YFLogxK
U2 - 10.1016/j.jimonfin.2013.05.010
DO - 10.1016/j.jimonfin.2013.05.010
M3 - Article
AN - SCOPUS:84880951967
SN - 0261-5606
VL - 37
SP - 282
EP - 305
JO - Journal of International Money and Finance
JF - Journal of International Money and Finance
ER -