Exchange Rate Volatility and Intra-Asia Trade: Evidence by Type of Goods

Authors


  • The paper benefited immensely from discussions with Kue Peng Chua, Willem Thorbecke and Diallo Ibrahima Amadou and comments from anonymous referees. The author acknowledges the very helpful research assistance of Beslida Corpuz. The views expressed are the author's and do not necessarily reflect the views and policies of the Asian Development Bank, its Board of Directors or the governments that ADB members represent.

Abstract

This paper examines the impact of intra-Asia exchange rate volatility on intra-Asia trade in primary goods, intermediate goods, equipment goods and consumption goods from 1980 to 2009. For Asia, the evidence shows that as intraregional exchange rate volatility increases, intraregional exports in these goods fall. This adverse impact is even more pronounced in the subregion of Association of Southeast Asian Nations (ASEAN)+5 comprising ASEAN member countries plus the People's Republic of China; Hong Kong, China; Japan; the Republic of Korea; and Taipei, China; and especially among intermediate and equipment exports. Again, the impact magnifies in an even smaller subgroup excluding the smaller ASEAN economies. These results underline the significant impact of exchange rate volatility on the region's production networks. For South Asia, however, exchange rate volatility appears to have a positive impact on exports. Still, caution is warranted given that South Asian economies trade relatively little with each other.

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