THE IMPACT OF EXCHANGE-RATE VOLATILITY ON INTERNATIONAL-TRADE - REDUCED FORM ESTIMATES USING THE GARCH-IN-MEAN MODEL

In this paper, we use a multivariate GARCH-in-mean model of the reduced form of multilateral exports to examine the relationship between nominal exchange rate volatility and export flows and prices. The model imposes rationality on perceived exchange rate volatility, unlike conventional, two-step strategies. Tests are performed for five industrialized countries over the post-Bretton Woods era. We find that the GARCH conditional variance has a statistically significant impact on the reduced form equations for all countries. For most of the countries, the magnitude of the effect is stronger for export prices than quantities. In addition, the estimated magnitude of the impact of volatility on exports is not robust to using the conventional estimation strategy.