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Revisiting the Diverse Empirical Findings on the Impact of Exchange Rate Volatility on Trade: Some Comparable Evidences from Ghana and Two other Developing Economies

Osei-Assibey, Kwame (2016): Revisiting the Diverse Empirical Findings on the Impact of Exchange Rate Volatility on Trade: Some Comparable Evidences from Ghana and Two other Developing Economies.

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Abstract

Although theories suggest that exchange rate volatility negatively affect international trade yet empirical studies on this relationship have produced mixed results. Guided by the growing consensus in the literature that empirical results may be sensitive to the class of countries considered as well as the proxy of exchange rate volatility used, this paper empirically examines this relationship for Ghana by augmenting a gravity model (that controls for fixed and events specific effects) with historical volatility forecasts (which are generated using three different estimation techniques). It was observed that between 1980 and 2005, exchange rate volatility did not impact on bilateral trade for Ghana and its trade partners considered. Comparable empirical experiments conducted on Mozambique and Tanzania showed similar relationship between exchange rate volatility and bilateral trade. Evidently these empirical findings present challenges to policymakers. The paper advocates that even though a number of reasons contributed to these observations, yet the overall potential consequences of exchange rate volatility on economic performances via volatility feedback effects, currency problems as well as persistent trade deficits should be of concern to policymakers. The useful policy lessons from the empirical findings may be obvious and debated widely but are relevant more than ever today since most sub-Saharan developing countries are still burdened with persistent external debts, deficits and currency problems even after enjoying a decade of stable and favourable commodity prices between 2000 and 2010.

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