 Exchange rate shocks and trade: A multivariate GARCH-M approachKevin Grier and Aaron D. Smallwood Journal of International Money and Finance, 2013, vol. 37, issue C, 282-305 Abstract: 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. Keywords: Real exchange rate uncertainty; Trade flows; Multivariate GARCH (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:37:y:2013:i:c:p:282-305 DOI: 10.1016/j.jimonfin.2013.05.010 Access Statistics for this article Journal of International Money and Finance is currently edited by J. R. Lothian More articles in Journal of International Money and Finance from Elsevier |
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