The effect of exchange‐rate risk on exports

This paper provides some additional empirical evidence on the effect of exchange‐rate volatility on exports. The novelties of the study include: a regime‐switching model in conditional volatility is employed to better capture the exchange‐rate uncertainty; a 2SLS method as suggested by Hsiao is used to estimate a system of the dynamic export equations; and an attempt has been made to reconcile the empirical findings with existing theories. We find that the regime‐switching model captures the exchange‐rate risks better and the empirical evidence by and large is consistent with Viaene and Vries, who argued that the existence of the forward markets and current account positions of the country would determine the impact of the exchange uncertainty on trade.