The relationship between export and exchange rate volatility: empirical evidence based on the trade between Malaysia and its major trading partners

Abstract

A number of theoretical models recommended that the impact of exchange rate volatility on trade may be positive or negative. Empirically, some studies found a robust negative relationship between exchange rate volatility and trade, while others were not. This paper empirically examines this relationship based on Malaysia’s monthly data from January 2000 to August 2012, using regression analysis of standard export demand models. In line with recent development in measuring volatility, the exchange rate volatilities in this study were measured by GARCH(1,1) models. The results from regression analysis show that Malaysian exports to the US and Japan are significantly related with exchange rates volatility. The impact of exchange rate volatility on Malaysia export to US was found negative; while for Japan, it’s positive. Malaysia’s export to the UK and Singapore was found not significantly related to the volatility in the exchange rates. The findings from this study clearly indicate that the relationship between export performance and exchange rates volatility is ambiguous.