Exchange Rate Volatility and Trade: An Empirical Investigation from the Egyptian Economy

Abstract

The main aim of this paper is to assess empirically the impact of exchange rate volatility (ERV) on the export and import functions in reference to Egypt’s major trading partners over the period of 1980–2016. Estimates of a cointegration relationship are obtained using the ARDL model. The conditional variance of the GARCH (1,1) model is taken as a proxy for exchange rate fluctuation. The observed outcomes reveal a significant negative coefficient of volatility on export and a non-significant positive coefficient on import. Indeed, this finding supports the traditional view that higher volatility will decrease export. To avoid the negative consequences of ERV, policymakers should shift from the concept of specialization based on the comparative advantage to competitive advantage and focus on the diversification of Egyptian exports while avoiding risks associated with market concentration by exploring potential opportunities that would increase trade openness by expanding Egypt’s trade with other countries, especially with low and middle-income and emerging countries.