Exchange rate volatility and export performance : evidence from disaggregated Norwegian data

Abstract

Abstract Ever since the breakdown of the Bretton-Woods agreement in 1971 researchers and policymakers around the world have sought to answer the question whether uncertainty about the movements in the exchange rates affects international trade flows. Even with numerous empirical attempts over the last decades, no consensus seems to be found. This thesis seeks to provide further evidence to the area within the context of a demand type export model, multivariate cointegration techniques and disaggregated data from the Norwegian industry. Applying a measure of exchange rate volatility from a GARCH (Generalized Autoregressive Conditional Heteroskedasticity) model, we find no evidence of any connection between exchange rate volatility and export performance. An important aspect of the analysis is the discussion of the time series properties of the exchange rate volatility measure. We show that our conclusion is unaltered regardless of whether the exchange rate volatility is treated as a stationary or a nonstationary variable. Then, we provide a thorough empirical investigation of an estimated conditional equilibrium correction model (EqCM), which explains the export volume by relative prices and international demand conditions. We demonstrate that the estimated EqCM model is well-specified and reasonably stable in-sample and performs well in an out-of-sample forecasting exercise despite a major monetary policy regime shift in Norway.