The Time-Varying Effects of the Exchange Rate and its Volatility on Korean Trade
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This study examines the time-varying effects of the exchange rate and of its volatility on Korean exports and imports volume, using data from total trade and from 50 industries classified under SITC 2 digit from period 2006:1 to 2009:3. For this experimentation, we adopted the Kalman Filter algorithm, which is more efficient in estimation and prediction because of its allowing the coefficients to change as time progresses. We found that the real depreciation of the Korean Won against the rest of the world’s currencies positively affects exports volume and negatively affects imports volume. The estimation coefficients of exchange rate volatility demonstrated positive and negative signs in export and import equations. Furthermore, the direction and the magnitude of the impact of the real effective exchange rate and its volatility are highly different across industrial sectors. In addition, we confirmed that the estimation coefficients of explanatory variables in our export and import volume equations are time varying. Particularly, the exchange rate’s increasing effects on export volume and its volatility have continued to grow, but the decreasing effects on import volume have fallen off in the recent period. These results are consistent with recent studies that show the effects of the exchange rate and of its volatility on international trade have become relatively weaker compared with the past.
Abstract
This study examines the time-varying effects of the exchange rate and of its volatility on Korean exports and imports volume, using data from total trade and from 50 industries classified under SITC 2 digit from period 2006:1 to 2009:3. For this experimentation, we adopted the Kalman Filter algorithm, which is more efficient in estimation and prediction because of its allowing the coefficients to change as time progresses. We found that the real depreciation of the Korean Won against the rest of the world’s currencies positively affects exports volume and negatively affects imports volume. The estimation coefficients of exchange rate volatility demonstrated positive and negative signs in export and import equations. Furthermore, the direction and the magnitude of the impact of the real effective exchange rate and its volatility are highly different across industrial sectors. In addition, we confirmed that the estimation coefficients of explanatory variables in our export and import volume equations are time varying. Particularly, the exchange rate’s increasing effects on export volume and its volatility have continued to grow, but the decreasing effects on import volume have fallen off in the recent period. These results are consistent with recent studies that show the effects of the exchange rate and of its volatility on international trade have become relatively weaker compared with the past.
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