The Effects of Exchange Rate Volatility on Korea-Germany Bilateral Trade - Industry Level Estimates
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The existing literature implies that the impact of exchange rate volatility on bilateral trade flows is inconclusive. It depends on specific industry and certain country. This article studies the impact of volatility of exchange rate on 62 importing industries and 47 exporting industries of Korea vis-à-vis Germany at disaggregated level of industry (SITC 3-digit product), using annually data during 1971-2014. The autoregressive distributed lag (ARDL) cointegration model is employed in empirical estimation. The findings indicate that the exchange rate volatility shows an impact on bilateral trade between Korea and Germany in both short run and long run period. However, in the long run, the majority of industries are unaffected. Only 24 out of 62 importing industries and 21 from 47 exporting industries are affected by the volatility. Among the affected industries, 18 exporting industries (account for 27.44 per cent of total exports from Korea to Germany) respond negatively to exchange rate volatility, while 3 industries respond positively in the long run. Likewise, for imports, 17 industries (account for 31.56 per cent of total imports of Korea from Germany) show negative coefficients and 7 industries show positive ones. The results also reveal that the products with small trade shares are more likely to respond to the exchange rate volatility than the major industries in both export and import sides. In addition, the effects of income and real exchange rate on bilateral trade flows are mostly in line with the theoretical prediction.
Abstract
The existing literature implies that the impact of exchange rate volatility on bilateral trade flows is inconclusive. It depends on specific industry and certain country. This article studies the impact of volatility of exchange rate on 62 importing industries and 47 exporting industries of Korea vis-à-vis Germany at disaggregated level of industry (SITC 3-digit product), using annually data during 1971-2014. The autoregressive distributed lag (ARDL) cointegration model is employed in empirical estimation. The findings indicate that the exchange rate volatility shows an impact on bilateral trade between Korea and Germany in both short run and long run period. However, in the long run, the majority of industries are unaffected. Only 24 out of 62 importing industries and 21 from 47 exporting industries are affected by the volatility. Among the affected industries, 18 exporting industries (account for 27.44 per cent of total exports from Korea to Germany) respond negatively to exchange rate volatility, while 3 industries respond positively in the long run. Likewise, for imports, 17 industries (account for 31.56 per cent of total imports of Korea from Germany) show negative coefficients and 7 industries show positive ones. The results also reveal that the products with small trade shares are more likely to respond to the exchange rate volatility than the major industries in both export and import sides. In addition, the effects of income and real exchange rate on bilateral trade flows are mostly in line with the theoretical prediction.
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