Abstract
The debate regarding the desirable degree of foreign exchange rate
policies hasbeen persisting for decades. Markets are able to effectively
achieve optimum efficacy and maximize welfare output when operated
without distortions. This research was guided by two key objectives;to
determine the impact of exchange rates on imports and to investigate the
impact of exchange rates on exports of economically developing countries.
This paper focusses on establishing whether there is a co-integrated
relationship between effective exchange rates of selected emerging countries.
Many studies have indicated that policies touching on exchange rates closely
affect the international trade of a country. This study applies the panel cointegration
method for the period of 1985-2012. The annual data used in the
empirical analysis were obtained from the World Bank data base. As a result,
there is co- integrated relationshipbetween effective exchange rates and
exports-imports of emerging countriesin the long run.
Keywords: Exchange rate, import, export, panel co-integration
Introduction
Developments of world economies position financial systems as
leaders in the world exchange market.In open economies, foreign exchange
rate policies are among the most important macroeconomic indicators,
because of the fact that they affect the business world’s investment
decisions.This is because the effect of foreign exchange rates on imports and
exports also directly affects the success of the policy, in terms of a reduction
in the foreign trade deficit. Today, the trends in the world economy as well
as the movement of goods and services, labor, technology and capital
throughout the world, regardless of the geographical boundaries, affect the
European Scientific Journal May 2014 edition vol.10, No.13 ISSN: 1857 – 7881 (Print) e - ISSN 1857- 7431
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economies of countries. Trade transactions involving more than one region
normally require the conversion of a currency to another currency.
The purpose of this research is to determine the impact of exchange
rates on the imports and exports of emerging countries. The intention of this
research was to develop an empirical study which will illustrate the nature of
the relationship between imports-exports and exchange rates. The movement
in exchange rates will be assumed to be as a result of exchange rate policies.
Additionally, it is a chance for the researcher to apply theoretical knowledge
to a practical situation through critical and robust methodologies as described
by Iqbal, Khalid & Rafiq (2011) and Bhattarai (2011). In the next section,
the literature review is summarized with the objective of gaining adequate
knowledge of the subject under research.
The aim of this study was to empirically analyze the relationship
between foreign exchange rates and imports-exports for twenty two
emerging countries over the period 1985-2012. The list of emerging
countries used in the model, reproduced in the Appendix I, Table I.
In the literature, there have been several studies indicating the
relation between real exchange rate (RER) and foreign trade. However, this
study differentiatesfrom previous studies in two aspects.
First, although in previous studies generally real foreign exchange
rate has been used as a dependent variable, in this study the real effective
foreign exchange rate was used as an indicator that considers inflation
differences, as well. Second, although most of studies in the literature
investigate the effect of foreign exchange rates on the foreign trade balance,
in this study the effect of foreign exchange rates on imports and exports were
analyzed separately.
In the second part of the study similar studies in the literature and
different opinions are mentioned. and In the third part,information about the
empirical methodology and data are given and the empirical results are
evaluated. Finally, the results and evaluations are mentioned.
Literature Review
Some authors in economics such as Bailey (2009) and Bhattarai
(2011) have arguedabout free independent exchange rate movements which
are not the result of central bank’ interventionsas a monetary policy
maker.De-Paoli (2009)demonstratesthe arguments on the desirable degree of
foreign exchange rate policyhavepersisted for decades. Similar arguments
are postulated by Alam& Ahmed (2012) who indicated that
someresearchersin the field of economicsand even academia have argued
that exchange rates should be determined freely by the mechanism of supply
and demand. In other words, markets should determine the optimal level of
exchange rates.
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Curcuruet al (2009) and Cruciniet al (2009)have also argued that
from the perspective of modern economics, especially the New Keynesian
economics, that view is arguably self-contradictory. They posit that markets
are a