The Impact of Exchange Rate Volatility on Balance of Trade: Evidence from Selected Emerging Economies

Abstract

This study investigates the effect of exchange rate volatility on the
balance of trade in Bangladesh during the period from 2012 to 2017. Four
different emerging economies (Indonesia, Malaysia, Mexico, and South Africa)
have also been considered in the same line to compare whether they are
exhibiting similar empirical evidence or not. In this study, ARCH
Heteroskedasticity test has been used to examine the presence of volatility in
foreign exchange data. Except Mexico, all the selected economies have positive
correlation between exchange rate and balance of trade. Bangladesh and
Mexico have uni-directional causality from exchange rate to balance of trade.
Indonesia has causality from balance of trade to exchange rate. However, South
Africa has bi-directional causality and Malaysia have no causality between the
variables. It can be said that Bangladesh is experiencing an absence of
exchange rate volatility which may in turn lead to cause the balance of trade of
the country. Other emerging economies are exhibiting a mixed result.