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Exchange rate volatility and ASEAN-4’s trade flows: is there a third country effect?

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Abstract

This paper investigates the impact of exchange rate volatility on the trade flows among ASEAN-4 countries (Indonesia, Malaysia, Singapore and Thailand) as well as to their five main trading partners. External volatility is included in the models to study the ‘third country’ effect on the trade flows. We employ annual import and export data over the period of 1980–2012. The results from the bounds testing approach to cointegration and error-correction model reveal that the real exchange rate volatility does play a significant role in 15 export and four import models in short-run and long-run. Moreover, in both import and export models, the effects of exchange rate volatility on trade flows are negative rather than positive. Finally, the effects of volatility from the ASEAN-4’s currency/yuan rate dominate the third country effect on the ASEAN-4’s trade.

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Notes

  1. Sources: Association of South East Asian Nations, ASEAN Statistical Yearbook 2013, Table V.3 and V.4, page 58.

  2. However there are also several studies that employed industry trade data to estimate the effect of exchange rate fluctuations on trade flows. These studies either investigate currency depreciation effect on trade flows (Soleymani and Chua 2014b) or they estimated the effect of exchange rate fluctuations (volatility or currency depreciation) on bilateral trade between the US and one of these four ASEAN countries (Bahmani-Oskooee and Satawatananon 2012; Bahmani-Oskooee and Harvey 2014; Bahmani-Oskooee and Harvey 2015).

  3. Data for Hong Kong started in 1981.

  4. See Thursby and Thursby (1987), Asseery and Peel (1991), Qian and Varangis (1994) and Bahmani-Oskooee and Hegerty (2009) for further discussion on the models.

  5. The significance of the normalized long run coefficients is evaluated by the t-statistics which are calculated from their standard errors. However, in Microfit statistical package, the standard errors of the normalized coefficients are computed using the nonlinear least square technique and the Delta method (Bahmani-Oskooee and Fariditavana 2015).

  6. The ARDL procedure is valid when all the variables in the model are integrated of order zero, I(0) or order one, I(1). In order to confirm to this condition, Augmented Dickey-Fuller (ADF) test will be conducted on all the variables to eliminate the possibility of I(2) or higher.

  7. For detailed discussion on the advantages of the bounds testing approach see Halicioglu (2007), Tuck (2007) and Mohammadi et al. (2008).

  8. Except for Singapore with her seven major trading partners.

  9. The Augmented Dickey-Fuller (ADF) test is conducted on first differences of all variables to eliminate the possibility that any of the variables is I(2) or higher. In both import and export models, ADF test results show that all test statistics are below the critical values (at least 10 % levels of significance) without or with trend. The ADF test results are available upon request.

  10. Given the relatively small sample size in this study, we used Narayan’s (2005) specific calculation of critical values for small sample size.

  11. The ECM are calculated using the normalized coefficients and Eqs. (1) and (2) for the import and export models, repectively. See Bahmani-Oskooee and Fariditavana (2015) for detailed discussion.

  12. For detailed explanation see Kremers et al. (1992) and Bahmani-Oskooee and Gelan (2006).

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Acknowledgments

The authors acknowledge the funding by Universiti Sains Malaysia, Short Term Grant (1001/PSOCIAL/6313020). The usual disclaimer applies. Any remaining errors are ours.

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Authors and Affiliations

  1. Economics Program, School of Social Sciences, Universiti Sains Malaysia, 11800 USM, Penang, Malaysia

    Abdorreza Soleymani, Soo Y. Chua & Abdul Fatah Che Hamat

Authors
  1. Abdorreza Soleymani
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  2. Soo Y. Chua
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  3. Abdul Fatah Che Hamat
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Corresponding author

Correspondence to Soo Y. Chua.

Appendix

Appendix

1.1 Data definition and sources

Annual data over the period 1980–2012 were used in the analysis. The data were obtained from the following sources:

  1. a)

    World Bank.

  2. b)

    International Monetary Fund (IMF), International Financial Statistics.

  3. c)

    International Monetary Fund (IMF), Direction of Trade Statistics.

1.2 Variables

X ij :

is the value of export of country j (ASEAN-4) to trading partner i (in US dollar), from source (c).

M ij :

is the value of import of country j (ASEAN-4) from trading partner i (in US dollar), from source (c).

LnY j :

real GDP of country j (ASEAN-4), from source (a)

LnY i :

real GDP of trading partner i, from source (a)

REX ij :

Real bilateral exchange rate defined as ((P j  * NEX ij )/P i , where NEX is the nominal bilateral exchange rate (end of period) defined as the number of partner i’s currency and per country j’s currency (from source (b)). P i is the trading partner i’s price level measured by CPI (from source (b)), and P j is the country j’s price level, also measured by CPI, from source (b).

VOL ij :

Variability measure of real bilateral exchange rate of country j’s currency/trading partner i’s currency. For each year we define it as the standard deviation of 12 monthly REX ij within that year. Monthly CPI data and nominal exchange rate data come from source (b).

VOL Cj :

Variability measure of real bilateral exchange rate of country j’s currency/yuan. For each year we define it as the standard deviation of 12 monthly real bilateral of REX Cj rate within that year. Monthly CPI data and nominal exchange rate data come from source (b).

VOL USj :

Variability measure of real bilateral exchange rate of country j’s currency/US dollar. For each year we define it as the standard deviation of 12 monthly real bilateral of REX USj rate within that year. Monthly CPI data and nominal exchange rate data come from source (b).

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Soleymani, A., Chua, S.Y. & Hamat, A.F.C. Exchange rate volatility and ASEAN-4’s trade flows: is there a third country effect?. Int Econ Econ Policy 14, 91–117 (2017). https://doi.org/10.1007/s10368-015-0328-9

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