The Exchange Rate Volatility and Exports Growth of the Selected Developed Economies

Abstract

Exchange rate volatility plays a pivotal role in shaping the trade policy of a country. This paper utilized a yearly time series and panel data to explore the relationship between exchange rate volatility and export growth of the selected developed countries (Poland, Sweden, UK, Italy, Germany, France, Denmark, Austria, and Belgium) between 1980-2020. Pooled Mean Group (PMG) and individual cointegration techniques were applied to evaluate the impact of exchange rate volatility on export growth in two-time horizons, i.e., short-run and long-run. Results confirmed that, in the long run, exchange rate volatility was cointegrated with export growth. The study further validated that in case of panel data, in the short run, exchange rate volatility suppresses export growth. At the same time, in the long run, it aids in accelerating export growth. At disintegrate level, in the short run, results were relatively insignificant except for Sweden and Italy, which had shown negative and significant association with export growth. In contrast, the long-run analysis revealed a significant positive impact of exchange rate volatility in most of the cases. Also, in case of panel data, if estimated elasticity is negative, then real depreciation could lower the real exchange rate and widen the export base. As exchange rate volatility could promote or hinder export activity, therefore, it is important for policymakers to consider exchange rate volatility while formulating the trade policy of the country. Also, stable and sustainable management of the exchange rate would bring stability and promotes long-term growth in an economy.