Exchange Rate Volatility and Exports: Some New Estimates From the Asean-5

This study addresses the relative paucity of research on the effect of exchange rate volatility on export performance in Southeast Asia by examining this relationship for the ASEAN-5 group, which includes Thailand, Malaysia, Singapore, Indonesia and the Philippines. In doing so, our study develops an export function model with domestic output, world output, terms of trade and exchange rate volatility as explanatory variables, and export volume as the dependent variable. To capture exchange rate volatility, we use of the real effective exchange rate, as opposed to the traditional bilateral exchange rate, as it accounts for price levels in the countries under study. From a statistical perspective, export volatility is derived from the real effective exchange rate using a GARCH model. Estimates for each of the ASEAN-5 countries are produced from panel data. Unit root tests indicate that all of the variables' series are integrated of order one, and hence they are stationary only in first-difference form. A Johansen-Fisher panel cointegration test rejects the null hypothesis of no cointegration. As such, the main model includes an error correction term, and, in order to ensure that the unobserved country-specific variables are not correlated with the right-hand side variables, a fixed effects estimator is used. The results suggest that changes in both domestic and world output have a positive effect on export volume, while a deterioration in the terms trade has a negative effect on export volume, at least for countries in this region. Lastly, exchange rate volatility has a negative impact on the export performance of the ASEAN-5. Our results suggest that, even though it is not possible to completely eliminate exchange rate volatility, governments can adopt appropriate macroeconomic policies to minimize the volatility of their respective currencies. In particular, given that the ASEAN-5 countries have adopted floating exchange rate systems, their corresponding central banks can intervene in the market in order to minimize exchange rate volatility. Additionally, these central banks might work to reduce volatility in their respective price levels as well.