1

EXCHANGE RATE VOLATILITY EFFECT ON MACROECONOMIC

FUNDAMENTALS IN THE GULF COOPERATION COUNCIL COUNTRIES1

1 Very preliminary research, not to be quoted

Mohammad Ahlis Djirimu Faculty of Economics Tadulako University, Central Sulawesi, Indonesia

Andi Darmawati Tombolotutu

Palu Muhammadiyah University, Central Sulawesi, Indonesia Farida Milias Tuty

Faculty of Economics Tadulako University, Central Sulawesi, Indonesia Abstract

At the time, based on the experience of the Southeast Asian and Latino American Countries, rates of investment and capital inflows have been high after the period of low rates of return of capital. However, moral hazard, because of excessive external debt, and the currency and maturity mismatch, remained the main problem in these countries. Regarding the financial dimensions, before the crisis 1994 and 1997, several key issues such as lack of control by the central banks, weak banking regulations, lack of insurance on saving of customers, the collusion between banks and private enterprises, corruption, low capital adequacy ratio, the failure in the institutions of regulatory experts, neglect and application of non-rational criteria in the allocation of the credits handicapping the state. The consequence of the rapid liberalization of current account and the deregulation of financial markets has resulted in increased capital inflows. This extension of the liberalization of capital markets was to support the provision of national institutions and private sector funds at low cost. Similarly, exchange rate policy applied by South-East Asia and Latino American was to reduce the volatility of domestic currency against the dollar, especially the risks of the debt in dollars. Internationally, the moral hazard has led international banks to lend to domestic banking sectors in South-East Asia and Latino American by neglecting the criteria of prudence. However, there was an asymmetry of regional exchange rates.

The Gulf Cooperation Council (GCC) was founded in 1980 by Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates (UAE). Since its inception, the GCC main objective of the GCC is to achieve economic integration between the forsaid countries, many steps have been taken out of these are the unified tariffs and a plan to achieve a monetary union by 2010. A successful monetary union requires adopting an effective single monetary policy, financial market integration, and reasonable economic convergence. One of the problem would be faced by the countries toward the economic integration is exchange rates volatility. Based on this reason, we would like to investigate the exchange rates volatility effect on macroeconomic fundamental in GCC countries.

The countries under study are Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates (UAE). The GCC data cover 40 observations from the 1970 to the 2011. In this study, the exchange rates volatility, reserves minus gold, export, investment, inflation level, crude petroleum production, gross domestic product refers to the CD-ROM International Financial Statistics International Monetary Fund (IFS-IMF) and website of each Central Bank country data and reports of the Central Bank concerned. The approach used in estimating the exchange rates volatility effect on macroeconomic fundamentals in six GCC countries is based on Augmented Dickey-Fuller test (ADF), Granger’s causality test, Johansen’s co-integration test, vector autoregressive (VAR) or vector error correction models (VECM).

According to our hypothesis, in the case of GCC’s macroeconomic vulnerability, this empirical research finds out that in the GCC countries, macroeconomic vulnerability is on track of the relation between exchange rate volatility and reserves minus gold, export, the inflation level by which inflation pass-through plays an important role, investment, the crude petroleum production, GDP. In partially, macroeconomic vulnerability can be proved by linkage between exchange rate volatility and reserves minus gold, by linkage exchange rates volatility and export, between exchange rate volatility and investment, by correlation between exchange rate volatility and inflation level, between exchange volatility and crude petroleum production, and by linkage between exchange volatility and GDP.

In general, in the Gulf Coperation Council Countries (GCC), exchange rate volatility only affect significant positively on crude petroleum and investment especially in Bahrain, Kuwait, Saudi Arabia. While in Oman, Qatar and the United Arab Emirates, exchange rate volatility does not affect the macroeconomic fundamentals. (JEL: E00, F30, O53)

Keywords: exchange rates volatility, reserves minus gold, export, investment, inflation level, crude petroleum production, gross domestic product, GCC countries.

2

I. Introduction

Until 1996, it is called, about Japan, South Korea, Taiwan, Hong Kong, Singapore,

Thailand, Malaysia and Indonesia, a real “miracle of East Asia”. Thus, the great economic

growth in these countries for three decades is seen by others. Hong Kong, South Korea,

Taiwan, Singapore became known as "four tigers" because of their economic performance.

However, these performances caused a syndrome of success in the form of economic

vulnerability whose symptoms are: (i) low competitiveness of the industrial sector because of

the facilities granted by governments to protect certain productions of goods, import

substitution policy which is favorable to the interior of the country, and operating facilities of

inputs available to certain private enterprises; (ii) lack of transparency between the banking

system, private sector and government; (iii) an implied warranty given to government debt

short term to finance long-term projects. According to the IMF (1997), the success of South-

East Asia before the crisis are the result of: (i) the rapid growth of private financial sector and

the role of human resources as an engine of growth; (ii) the high level of domestic savings;

(iii) the decrease of the population compared to other developing countries; (iv) development

policies; (v) and the stability of macroeconomic performance such as GDP per capita, the

inflation rate, foreign exchange reserves, external debt, and the exchange rate. The rapid

economic growth in South-East Asia is promoted by government intervention that, in this way

creates a climate conducive to sustainable growth. The essential role of the state manifests

itself concretely in the form of outward-oriented policies, the rapid growth of savings and

investment, the discipline of macroeconomic policy.

In Contrast, GCC economies are highly dependent on oil and gas exports. Oil price

upturns lead to higher oil revenues, stronger fiscal and external positions, and higher

government spending. This boosts corporate profitability and equity prices and strengthens

bank balance sheets, but can also lead to the build up of systemic vulnerabilities in the

financial sector. Banks in the GCC are well-capitalized, liquid, and profitable at present, and

well-positioned to manage structural systemic risks. However, oil-macro-financial linkages

mean that asset quality and liquidity in the financial system may deteriorate in a low oil price

environment and financial sector stress may emerge. During 2011–14, hydrocarbon exports

represented about 70 percent of exports of goods and services on average. Fiscal dependence

on hydrocarbon revenues was even greater, accounting for over 80 percent of total fiscal

revenues on average. Over time, the dependence on hydrocarbon fiscal revenues has not

declined despite efforts at economic diversification. It could be recognized in terms of

resource curse or dutch desease. The GCC non-oil sectors are dependent on the oil sector

either directly or through government spending. This economic structure constrains the ability

3

of banks to truly diversify their credit portfolios. Further, banks have exposures to connected

counterparties that arise from the ownership and control links in the GCC corporate sector.

These structural systemic risks can be addressed by macroprudential policies that control

structural vulnerabilities within the financial system.

II. Theoritical Analysis

There is little real consensus on either the meaning or the importance of the relationship

between exchange rate volatility and trade. Overall, among the studies reviewed, the majority

of them concluded that the volatility of the currency tends to lower the level of trade. But,

when this is measured, it is relatively minor. The weakness of this link may be explained in

several ways (Coté; 1994) : (i) an increased risk does not necessarily lower risk activities even

for companies that have a risk aversion; (ii) the hedging techniques enable companies to

significantly reduce, at low cost, currency risk; (iii) the volatility of exchange rates may

actually offset other types of risks; (iv) the volatility of exchange rates can create conducive

conditions to trade and invest profitably. The consequence of the volatility of exchange rates

became the center of the debate on the optimality of different exchange rate regimes after the

abandonment of the Bretton Woods system in the early ‘70s. Proponents of fixed exchange

rate say that since the abandonment of this system, exchange rates are highly unstable,

extremely volatile and their values deviate from the equilibrium point. According to their

views, the volatility of exchange rates deteriorates international trade. In contrast, proponents

of the flexible exchange rate say that exchange rates are driven by macroeconomic

fundamentals to fixed parities. A flexible exchange rate results in adjusting the balance of

payments to meet the external shocks and to reduce the increase in customs duties, or to

control capital flows to macroeconomic equilibrium. In fact, the volatility of exchange rates

can directly affect foreign trade by the uncertainty and the cost of adjustment and can

indirectly affect the structure of the output, through investment and the policy of the state.

Aristotelous (2001), Ariza et al (2000), Ariza et al (2003), Bredin et al (2003), Kasman

and Kasman (2005) and Poon et al (2005) show that, except for the study of Kasman and

Kasman (2005), other studies use the real effective exchange rate and the same measures of

volatility (Moving Average Standard Deviation), the same data exports, the same type of data

(aggregated) with the exception of the study Bredin et al, the same frequency data, quarterly

data except Aristotelous study, and the same estimation methods, that is to say the test of

Johansen co-integration. The results obtained are different and both the studies of Ariza et al

(2000 and 2003) and Poon et al (2005), explains with the conventional theory that the

volatility of the exchange rate worsens the trade, but the Aristotelous’ study showed that the

relationship between exchange rate volatility and foreign trade is not significant and the

4

studies of Bredin et al (2003) and Kasman and Kasman (2005) found a significant positive

relationship in all equations.

Choudry (2005), Sukari and Hassan (2001) used the same instruments that previous

studies with the exception of the measure of volatility, because they used models generalized

autoregressive conditional heteroskedasticity (GARCH). The study by Choudry is current

U.S. exports to Canada and Japan, while the study of Sukari and Hassan supports only U.S.

exports. The study shows that Choudry, among four equations tested, three verify the

conventional theory that the volatility of the exchange rate worsens the trade. The study by

Sukari-Hassan also supports this view.

Doyle (2001), Du and Zhu (2001), Fang and Miller (2004) and Zainal (2004) used the

same REER (except to the study of Zainal who applied the NEER) the same measures of

volatility namely GARCH models, and the same data types. With the exception of the study

who used Doyle exports according to the categories of Standard International Trade

Classification (SITC) and Zainal study that used industry data, they used data of different

frequencies and samples of different periods and different methods of estimation (the co-

integration test of Engle-Granger applied by Doyle, the test applied by Du and Zhu, GARCH

models applied by Fang and Miller and testing "Distributed autoregressive lag ARDL

bounds" applied by Zainal. Doyle studies showed that among 34 equations, 25 showed a

positive relationship between the volatility of exchange rates and external trade, and only 12

of these equations are significant. Seven equations give a negative relationship between

volatility in exchange rates and foreign trade, of which five are significant. The study of Du

and Zhu showed that among six equations, four are negative but there is only one equation

that is significantly negative. The Fang and Miller study also supports the conventional

theory. Zainal's study showed that among seven equations, two had a significant positive

relationship between the volatility of exchange rates and export sector, while a single equation

had a positive relationship between non-significant volatility and export sector.

Vita and Abbott (2004) and Donganlar (2002) used the same instruments with the

exception of the estimation method (they used the test of "Autoregressive Distributed Lag",

ARDL bound), the same sample period and the same country of study. Vita-Abbot found an

ambiguous result that three equations are significantly negative. A single equation between

the volatility of exchange rates and external trade was significantly positive. Donganlar found

that by using the cointegration test of Engle-Granger, five equations, four of them were

significantly negative. According to these, the study Donganlar supports the conventional

theory and even the study of Vita-Abbot in three equations.

5

Rahmatsyah et al (2001), and Bohar-Sauer (2001) and Rajan and Siregar (2004) used

different countries of study: trade of Thailand, the United States and Japan, 91 countries,

including 22 countries developed and 69 developing countries, trade between Indonesia and

Japan, the frequency of different data, and different sample periods. The study Rahmatsyah et

al (2002) used the NEER and REER, while the other two studies used the REER. Rahmatsyah

et al found that among 16 equations, 12 equations significantly supported the conventional

theory that the volatility of the exchange rate worsens the trade. Three equations have a

positive relationship, but only one is significant. Sauer and Bohars showed that among 108

equations 82 support the conventional theory, 77 are significantly negative; in other words,

these equations have show the real exchange rate volatility deteriorating trade. Twenty-six

equations indicated no significant positive relationship between the volatility of real exchange

rates and foreign trade. While Siregar and Rajan found that among 12 equations, using

exports and imports to Indonesia and from Japan, 9 equations support the conventional

hypothesis that the volatility of real exchange rate worsens the foreign trade. There is only

one significant positive relationship between the non-volatility of real exchange rates and

foreign trade.

Bustaman dan Jayanthakumaran (2006), Chit-Rirov-Willenbockem (March 2008),

Aliyu (October 2008) and Bredin and Cotter (October 2008) show different results depending

on the methods used, the countries studied, data types, and the frequencies of observations.

The Bustaman-Jayanthakumaran studies used 18 data of goods exported from Indonesia to the

United States and found that 18 goods had a statistically significant relationship of co-

integration in the long run. Among the 14 goods, six had significant coefficients of volatility.

Two commodities had negative relationships between the volatility of nominal exchange rates

and quantities of exported goods (raw cocoa and cocoa produced), while four had positive

relationship goods, namely the prepared fish, textiles, pulp paper and auto parts. In fact, the

results of the study and Bustaman-Jayanthakumaran are ambiguous. The study-Chit-Rizov-

Willenbocker-Aliyu and in the case of more than 14 ANSEA5 trading partners (the European

Union, the United States, Japan, China) and the case of Nigeria supports the conventional

hypothesis. The study Bredin and Cotter also gives an ambiguous result.

Many studies on the determinants of direct investment (FDI) have been made since the

‘90s. These studies found the determinants of the extent of FDI and an update on

macroeconomic variables such as exchange rates, the number of telephone lines, the real GDP

growth, the ratio between exports and GDP, share of manufacturing in GDP, the costs of

labor, rate of inflation, portfolio investment and infrastructure as determinants of FDI. Froot

and Stein (1991) analyzed the impact of real exchange rates on FDI from several European

6

countries to the United States using annual and quarterly data for the period 1974 - 1987.

They found that the depreciation of European currencies vis-à-vis the USD has discouraged

the flow of FDI into the United States. A similar relationship was indicated by the studies of

Klein and Rosengren (1994), Golberg and Klein (1998), Ito (2000), Sazanami et al (2001).

They showed that the appreciation of the currencies of countries of origin of FDI vis-à-vis the

currencies of recipient countries has encouraged FDI. Klein and Rosengren (1994) analyzed

FDI flows that have passed Canada, Japan and several European countries to the United

States during the period 1979 - 1991, while Bayoumi and Lipworth (1998), and Golberg and

Klein (1998), Ito (2000), and Sazanami et al (2001) analyzed the impact of exchange rates on

Japanese FDI in different periods. Except for the study of Froot and Stein (1991) and the

Sazanami et al study (2001) that analyzed FDI in several sectors, most of these studies

evaluated the relationship between exchange rates and FDI flows. Some studies have also

considered other independent variables in their research. For example, Klein and Rosengren

retained the costs of labor and assets. As Sazanami et al retained the costs of labor and the

cumulative FDI from countries of origin. Both studies found that the cost of labor rates have

discouraged FDI to recipient countries. Sazanami et al reported that cumulative FDI

encouraged FDI from countries of origin. Few studies provided an update on the impact of

exchange rate volatility on FDI. Golberg and Kolstad (1995) observed volatility of exchange

rates on FDI bilateral moving from Canada, Japan and Great Britain to the United States using

quarterly data for the period 1978 - 1999. They measured the volatility of exchange rates by

calculating the standard deviation of real exchange rates. They found that the volatility of the

exchange rate had a positive impact on FDI. Benassy-Quéré et al (2001) observed the impact

of volatile exchange rates measured by the coefficient of variation of quarterly nominal

exchange rates on FDI from developed to developing countries during the period 1984 - 1996.

Using annual data, they found that the increased volatility of exchange rates has discouraged

FDI. These two studies give different results from the impact of exchange rate volatility on

FDI. We note that both studies get the expected relationship between exchange rates and FDI

because they have shown that the appreciation of the currencies of origin FDI countries vis-à-

vis the currencies of recipient countries could promote these FDI.

The most recent studies were conducted by Morrisey and Udomkerdmongkol (2008),

and Gottschalk and Hall (2008). Morrisey and Udomkerdmongkol (2008) used samples of 16

emerging countries and panel data for the period 1990 - 2002. These countries were three in

number in Africa (Tunisia, Morocco, South Africa), five in Asia (Pakistan, China, Malaysia,

the Philippines and Thailand), and seven in Latin America (Bolivia, Colombia, Costa Rica,

the Republic of Dominican, Paraguay, Uruguay and Venezuela). They used aggregate annual

7

data for 1990 - 2002 and have attempted to test the three hypotheses Chakrabarti and

Scholnick assumptions. If ceteris paribus, (i) there is a negative relationship between expected

depreciation of national currencies of recipient countries FDI and FDI flows; (ii) FDI increase

when the devaluation occurs; and (iii) the volatility of the currencies of recipient countries of

FDI discourages FDI. In addition, a better economic condition and foreign investor

confidence in the political and economic condition of recipient countries determine

significantly the entry of FDI. But in their study, they modified the assumptions of

Chakrabarti and Scholnick under which the entry of FDI is a function of the level of exchange

rates, volatility in exchange rates and exchange rate shocks due to limits encountered in the

data and the availability of frequencies. In short, Morrisey and Udomkerdmongkol justified

that the independent variables that affected U.S. foreign direct investment include: (i) the real

effective exchange rate (REER, 2000=100) data from IFS-IMF and from the World

Development Indicators (WDI 2004); (ii) the bilateral exchange rates official means (the

national currencies of recipient countries of FDI compared to USD); (iii) the share of

manufacturing in GDP (it is the proxy of the degree industrialization of a country); (iv) the

inflation rate, measured as the percentage of the annual GDP growth, it becomes the proxy for

macroeconomic conditions; (v) the ratio of exports of goods and services relative to GDP and

has become the proxy of export potential; (vi) the GDP per capita was the proxy of the costs

of labor; (vii) portfolio investment relative to GDP was the proxy of confidence foreign

investment; (viii) the number of telephone lines was the proxy infrastructure; (ix) GDP

growth was the proxy of the potential market. Using OLS, the inclusion of fixed effects and

random effects, the test Hausmann, the approach of the Hodrick-Prescott and the VAR, the

results showed the following:

First, there were strong positive relationships (or negative) between the devaluation

(appreciation) of national currencies of recipient countries of FDI inflows and FDI. Second,

there was a negative (positive) between the expected depreciation (appreciation) of national

currencies of recipient countries of FDI and the entry of FDI. These results indicated that the

growth of FDI in these countries is rather intended to cover domestic demand in the financial,

telecommunications, wholesale and retail to take advantage of low wages. Third, there was a

negative relationship between volatility in exchange rates and the entry of FDI. Fourth, the

interaction between changes in the logarithm of the index REER (ΔREER) and the temporary

components of bilateral exchange rates (TFXD) are significant. This means that REER are

more volatile, the more FDI is affected. Fifth, they found that the economic condition and the

confidence of foreign investors are significant. Sixth, the 1997 economic crisis in South-East

Asia had no impact on U.S. FDI in emerging markets.

8

The second recent study was conducted by Gottschalk and Hall (2008) on FDI and

uncertainty of exchange rates in South-East Asia. They studied the relationship between

exchange rate volatility, diversification of risk levels and location of FDI in manufacturing in

the countries of South-East Asia such as Indonesia, Malaysia, the Philippines and Thailand.

They found that the Yen and USD have an important role in the location choices of Japanese

and American investors. Their study also showed that the volatility of the yen and the

correlation between the national currencies of the four countries vis-à-vis the yen significantly

determined U.S. and Japanese investments in the region.

An important perspective is one that justifies the relationship between exchange rate

regimes and inflation by pegging exchange rate, which contributes to the stability and

promotes a low level of inflation. The experience of emerging countries where institutions are

weak, the pegging exchange rate provides an important tool to control inflation by means of a

commitment to exchange rate stability and discipline in relation to growth in the money

supply (Crockett & Goldstein, 1976). With regard to small and open economies, the pegging

of nominal exchange rates helped these countries to minimize fluctuations in the level of

domestic prices and contributed to economic stability (Mac Kinnon, 1963). In contrast, in

countries where institutions are strong, independent central banks and financial markets more

efficient, low levels of inflation can be achieved without specific commitment to implement

the targeting of exchange rates (Calvo & Mishkin; 2003).

More recently, inflation targeting has become a tool for achieving price stability in

developed countries and emerging countries. In most of the relatively closed economies,

inflation targeting involves freely floating exchange rate that will not affect the volatility of

inflation, since the fraction of the price of goods compared to the aggregate price level is

comparatively small. However, in relatively open economies, fluctuations in exchange rates

may affect price stability. Then, the exchange rate should remain stable.

A significant number of empirical studies tried to test the relationship between the

choice of exchange rate regimes and inflation levels recorded. Edwards (1993) has tried to see

if the exchange rate peg allowed inflation to improve performance by introducing a degree of

financial discipline. He used a sample of 52 emerging countries for a period from 1980 to

1989 and showed that inflation levels are much lower in countries where exchange rate

regimes are fixed. It stresses the possibility of reverse causality in the sense that there is no

evidence that these are countries with low inflation that adopt exchange rate regimes or that

the regime set in place generates low inflation. Ghost et al (1996) reached the same

conclusion that countries with low inflation rates have a pronounced tendency for the fixed

exchange rate, but also in the other direction, the fixed exchange rate led to lower inflation.

9

There are two indepth studies concerning the relationship between exchange rates and

inflation in the South-East Asian countries: first, the study of Ito and Sato (2006) who

analyzed the evolution of exchange rates and inflation after the crisis using a VAR approach.

They analyzed the direct effect (past-through effect) of the movement of exchange rates on

domestic prices in countries such as Indonesia, Malaysia, Singapore, Thailand and South

Korea. They made certain variables, such as oil prices, the common variable. They also used

country-specific variables, such as the base currency of each country (M1), the nominal

effective exchange rate (NEER) index of manufacturing production, the index of consumer

prices (CPI), the producer price index (PPI) and the index of import prices. Their results

showed that, first, the degree of direct effects of shocks on exchange rates varied across the

different indices, the largest effect being felt through the index of import prices, the index of

producer prices (PPI) and the lowest effect being felt through the consumer prices index

(CPI).

The response of domestic prices to shocks in exchange rate was also high for Indonesia

than in the other country. The response of the CPI vis-à-vis the impact of exchange rate was

much higher in Indonesia than in any other country. In addition, the CPI will react more

sharply to shocks elsewhere in the producer prices index (PPI). This implies that the

transmission of shocks passed regularly by wholesale sales to consumers. In addition, the

difference in inflation rates between Indonesia and the other four countries after the crisis is

attributed to the political reaction of the Central Bank of Indonesia. Since the relationship as

"impulse response" of the variables affected by monetary policy shocks on exchange rates

that the relationship "impulse response" variables affected by monetary policy shocks on the

index of consumer prices is positive and statistically significant. This implies that the

domestic inflation rate of Indonesia after the crisis and until 2005 was discouraging in terms

of competitiveness with neighboring countries. Finally, unlike the direct effects through the

CPI, it became more evident between Indonesia and other countries affected by the crisis.

Second, the study by Chan (2008) attempted to measure the coefficient of exchange

rates direct short-term and long term using simple regression models linking the relationship

between the consumer prices index and determining variables such as exchange rates of each

currency, the PPI, the nominal GDP of Malaysia, Indonesia, the Philippines and Thailand.

The result showed that the ratio remained at 0.3 for the four countries. This implies that the

four countries managed to stabilize inflation after the Asian crisis. The intervention on the

exchange rate will be less favorable trade balance. The co-integration test indicates that there

is a long-term relationship between CPI, GDP, exchange rates and index of producer prices

(PPI) of the United States in these four countries. However, this study needs to be developed.

10

Chan found that the coefficient of the direct effect of exchange rate on inflation in Indonesia

was only 11%. While the results using the VAR model was 57%.

There is substantial literature on the effect of exchange rate regimes on economic

growth. In more general terms, this literature does not lead to conclusions that it is a positive

effect on the stability of exchange rates on economic growth and a negative pegging exchange

rate with increasing the output. We can identify two reasons why the stability of exchange

rate stimulates increased economic growth.

First, the elimination of risks in foreign trade stimulates foreign trade and international

division of labor. Frankel and Rose (2002) found a strong positive impact of fixed exchange

rates on trade and income in the context of monetary union.

Second, the fixed exchange rate regimes are able to create a stable macroeconomic

environment by lower risk premiums for a real interest rate. Therefore, the real interest rate

stimulates long-term investment, consumption and economic growth (Donbusch, 2001). For

example, the Baltic countries, Bulgaria, Bosnia and Herzegovina apply a strict agreement on

the exchange rate for reasons of macroeconomic stability and to strengthen their economic

growth. However, by the flexible exchange rates, a country can easily adjust to real shocks.

Under fixed exchange rate regime, the adjustment of real exchange rates must be made by the

change in relative prices, which means costly rigidities. This can cause an excessive burden

on the economy, and ultimately result in lower economic growth.

Nevertheless, the experience of the financial crisis shows that the cost of maintaining

pegging exchange rate system of full capital mobility is very expensive. The exchange rate

with anchor becomes subject to speculative attacks. The experience of Estonia during the

speculative attacks on the CEECs in 1998 shows that the rise in interest rates is costly for the

country that keeps exchange rates anchored (Fischer, 2001). Therefore, the flexible exchange

rate regime may be more appropriate to avoid the crisis and to achieve stable economic

growth over time.

The flexible exchange rates can, in principle, reduce the vulnerability of the economy

by acting as shock absorbers, but they introduce an important element of volatility. The

volatility of the nominal exchange rate is usually associated with a high variability of real

exchange rate and thus to macroeconomic volatility. Hausmann and Gavin (1996) provided an

overview of different ways that macroeconomic volatility was measured in the literature and

the estimated effect of this volatility on economic growth. The IMF (1997) shows that

intermediate exchange rate regimes are associated with faster economic growth, while the

flexible exchange rate regimes generate growth rates the lowest. However, Reinhart and

Rogoff (2002) find that economic growth is best under a flexible exchange rate regime and

11

the intermediate regimes are those who are less well with poor results. Finally, the effects of

exchange rate regimes on growth obviously depends on the degree of economic development

since the flexible exchange rate regimes are associated with growth rates highest in the

industrialized countries while the performance is relatively poor in emerging economies.

Three recent studies have analyzed the relationship between the volatility of exchange

rates and economic growth. First, the study of Azide et al (2005) concerns the impact of

exchange rate volatility on growth and economic performance of Pakistan over the period

1973 - 2003. Second, the study of De Grauwe and Schnabl (2006) analyze on the stability of

exchange rates, inflation and economic growth in CEE. Finally, the study of Schnabl (2007)

deciphers on volatility and growth in emerging European and South-East Asian countries.

The study of Azide et al (2005) explains that the concept of exchange rate is the price of

a currency that has a relationship with other currencies. The exchange rate is a conversion

factor, a multiplier ratio. It depends on the direction of conversion, while the volatility is

defined as an indicator of instability or uncertainty. It is a measure of risk, such as asset

prices, portfolio optimization, and the choice of price and risk management. These risks can

be the "input" of various economic decisions. The volatility of exchange rate uncertainty

described in international transactions in goods and financial assets. Exchange rates are

relative prices of financial assets in the future. They reflect an unanticipated change in supply

and demand for financial assets and foreign currencies. They are the seeds of optimism in

determining the supply of currencies, interest rates and income. Azides et al have used the

method GARCH (generalized autoregressive conditional heteroscedasticity) to measure the

movements of exchange rates and predict. They also used the co-integration test, Dickey-

Fuller Augmented test (stationary/unit root test, 1979, 1981), the VAR approach, the

Granger’s causality (1969), the variance decomposition and the impulse response functions to

shocks. They used variables measuring economic performance, such as real exchange rates of

Pakistani rupee, exports, imports, supply of money, and the output of manufacturing

industries as independent variables. They could not measure the effect on economic growth of

the uncertainty of exchange rates and found that there was a significant positive relationship

between the non-volatility of exchange rates and economic performance. This result was not

consistent with the hypothesis that the decline in the exchange rates volatility could promote

the production of the manufacturing sector. Previous empirical studies show that there is a

negative link between exchange rates volatility and economic growth (Aghevli et al, 1991)

and (Obstfeld, 1995). But, the difference between previous studies and the study of Azide et

al relates to the data. The study of Azide et al used time series data, while previous studies

12

used cross-sectional data. In fact, the application of different exchange rate regimes also

affects the result of the study.

Second, the study of De Grauwe and Schnabl (2006) analyzed the impact of exchange

rate regimes on inflation and economic growth in Central and Eastern Europe (CEE) using

panel estimates for the period 1994 to 2004. They found that de facto measures of the stability

of exchange rates better explain the equations for inflation and economic growth as measures

of de jure. In addition, the result shows that there is a significant impact of the stability of

exchange rates on low inflation, and there is also a significant positive impact between high

stability of exchange rates on real economic growth. When they divided the research period in

times of high inflation (1994 - 1997) and period of low inflation (1997 - 2004), they found

that the stability of exchange rates resulted in the disappearance of inflation. The relationship

between the stability of exchange rates and high real economic growth has been robust. This

result indicates that membership of the CEECs to the European Monetary Union has a

positive impact on economic growth in these countries.

Third, the study of Schnabl (2007) concerns on the volatility of exchange rates and

economic growth in emerging Europe and emerging East Asia countries. He found that: (i)

the countries of South-East Asia have maintained the stability of their exchange rates vis-à-vis

the USD after the crisis in 1997 and that the emerging CEE countries also maintained stability

of their exchange rates vis-à-vis the euro, although some countries such as Poland and the

Czech Republic admitted the total float of their currency; (ii) the emerging Europe and South-

East Asia continue to have rapid growth when the fixed exchange rate is chosen. He also

found that the fixed exchange rate had a positive impact on international trade, interest rates

and macroeconomic stability; (iii) in emerging Europe, the positive impact of stability on

economic growth during the observation period is the process of macroeconomic stabilization

at the time of accession of the CEECs to the European Union. In South-East Asia, the

negative impact of exchange rate volatility on economic growth was stronger and it could be

said the strong tendency of countries in South-East Asia, including Japan, to anchor their

currencies to the dollar; (iv) the positive impact of the stability of exchange rates on economic

growth was not linear, a situation conducive to international investment has encouraged the

entry of speculative capital and economic overheating as it has shown by the experience of

the Asian crisis.

III. Data and Method

The countries under study are Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the

United Arab Emirates (UAE). The GCC data cover 40 observations from the 1970 to the

2011. In this study, the exchange rates volatility, reserves minus gold, export, investment,

13

inflation level, crude petroleum production, gross domestic product refers to the CD-ROM

International Financial Statistics International Monetary Fund (IFS-IMF). In the case of

Bahrain, Oman, Qatar, Saudi Arabia, United Arab Emirates (UAE), the exchange rate

volatility represented by Nominal Effective Exchange Rate (NEER). For the reason of

inavailability in the case of Oman’s data, inflation level, investment and gross domestic

product could be excluded from the analysis. For the reason of lack data on level of inflation

in UAE, the inflation level has been excluded in econometric model.

The approach used in estimating the exchange rates volatility effect on macroeconomic

fundamentals in six GCC countries is based on Augmented Dickey-Fuller test (ADF),

Granger’s causality test, Johansen’s co-integration test, vector autoregressive (VAR) or vector

error correction models (VECM).

The approach used in estimating the exchange rates volatility effect on macroeconomic

fundamentals in six GCC countries is based on Augmented Dickey-Fuller test (ADF),

Granger’s causality test, Johansen’s co-integration test, vector autoregressive (VAR) or vector

error correction models (VECM). Since the employed econometric techniques are quite

standard, the detail will not be presented in this paper.

We will firstly analyze the effect of volatile exchange rates of national currencies of the

six GCC countries on the characteristics of each country’s macroeconomic fundamentals,

namely reserve minus gold (RES), export (EXP), inflation level (INF), crude petroleum

production (CRU), investment (INV), and economic growth (GDP). We use time series data

from the IMF of each country using the procedure of econometric analysis.

In order to study more thoroughly the effect of the volatility of exchange rates on

macroeconomic fundamentals in the six GCC countries, we apply first, the ADF test. This test

is designed to analyze the stationarity of each variable. Second, we perform the test of

Granger causality. Third, if the ADF test shows that all data are stationary at the order=0 [I

(0)], therefore, we apply VAR models. If the data are stationary at the first differences [I (1)],

we apply therefore the vector error correction models (the unrestricted VAR). Fourth, before

the application of VAR or VECM, we apply the cointegration test of Johansen. Once the data

are cointegrated at the first differences, we choose the vector error correction model.

IV. Finding

From a theoretical point of view, the volatility of exchange rates has a negative impact

on macroeconomic variables such as, export, inflation level, crude petroleum production,

investment, and GDP. In contrast, the exchange rate volatility has a positive impact on reserve

minus gold.

14

Firstly, we will study the positive linkage between the exchange rate volatility and

reserve minus gold.

Secondly, we analyze the indirect effect of exchange rate volatility on the balance of

trade over the amount of exports and imports. When the exchange rate appreciates, therefore,

the export volume decreases, vice versa. When exchange rates are stable, imports may

increase due to higher income. But, when the exchange rates are volatile, this volatility affects

the price of imported goods. When the currencies depreciate, the price of imported goods

rises. Therefore, the import volume decreases and vice versa. In this research, we only

analyze the exchange volatility effect of export.

Thirdly, the effect of the volatility of exchange rates on inflation can be classified into

two categories: (i) first, a direct effect, which requires imported products such as consumer

products, materials and industrial equipment. The direct effect of consumer products is the

most important because it affects the sales prices of these products within the country.

Imports of these products have a high elasticity with respect to exchange rate movements.

While, the direct effect of imports of raw materials and imports of industrial equipment is

secondary, because the process of production was set by their price. Imported quantities of

these products have a low elasticity with respect to changes in exchange rates and relative to

consumption goods; (ii) second, an indirect effect that goes through an increase in demand.

When the appreciation of foreign currencies against the rupiah is followed by an increase in

foreign prices, therefore, the incomes of domestic exports increased. Their demands for

domestic goods and services also increase. Finally, this increase in demand leads to higher

domestic prices.

Fourthly, we analyze the indirect effect of exchange rate volatility on the crude

petroleum production over the oil price.

Fifthly, the empirical studies show the negative effect of exchange rate volatility on

investment. The increasing of exchange rates volatility discourages FDI to recipient

countries.The appreciation of the currencies of the origin countries of FDI against the

currencies of recipient countries of FDI encourages FDI, and vice versa.

Sixthly, we see that more recent studies show that the stability of exchange rates has a

positive impact on economic growth.

According to the table 1, in Bahrain, Bahrain volatility of the currency exchange rate is

only a positive effect on crude petroleum production. Reserve minus gold is also a positive

effect on crude petroleum production. Exports of Bahrain has a positive impact on

macroeconomic variables which four reserve minus gold, inflation, crude petroleum

production and investment. Crude petroleum production has a positive impact on exports and

15

investment. Instead, the investment has a positive and significant impact on reserve minus

gold, inflation, and crude petroleum production. Economic growth in the short term has

significantly effect exports.

Table 1 Result of the short-run impact of exchange rate volatility on macroeconomic fundamentals in Bahrain in the 1970-2011 period

Dependent Variables

Independent Variables

∆ER Vol ∆ RES ∆ XPORT ∆ INFLATION ∆ CPP ∆ INV ∆ GDP ECTt-1

∆ER Vol - 1.68250 1.00337 0.49390 0.18714 1.20382 0.29245 0.13902 (0.20241) (0.32283) (0.48648) (0.66775) (0.27946) (0.59181)

∆ RES 0.65138 - 10.2372*** 0.24275 0.14952 4.26799** 0.12491 -0.47046 (0.42464) (0.00278) (0.62506) (0.70115) (0.04570) (0.72572)

∆ XPORT 0.00987 2.62548 - 0.61724 7.59367*** 1.95922 3.38862* -2.13416** (0.92137) (0.11343) (0.43694) (0.00894) (0.16971) (0.07347)

∆ INFLATION 2.25623 1.78242 4.48803** - 0.000035 4.79336** 0.55654 -0.35745 (0.14134) (0.18980) (0.04073) (0.99530) (0.03478 (0.46025)

∆ CPP 3.24288* 9.29871*** 15.5704*** 0.91444 - 24.7424*** 2.55318 -4.87129** (0.07968) (0.00416) (0.00033) (0.34498) (0.0000014) (0.11836)

∆ INV 0.00389 0.00216 2.89519* 0.43937 8.05929*** - 1.32775 -1.08306 (0.95057) (0.96315) (0.09701) (0.51143) (0.00723) (0.25640)

∆ GDP 1.76923 0.41298 1.79392 0.00947 0.06606 2.35094 - -0.51699 (0.19141) (0.52432) (0.18841) (0.92301) (0.79855) (0.13349)

Notes : (1) The value in parentheses are the p-value. For ECT, the values in parentheses are t-ratio (2) Asteriks (*), (**), (***) indicate significance at 10, 5, 1 percent level respectively (3) Two cointegrating vectors are incorporated into the VECM analysis since the trace test has some advantages over the maximum eigenvalues test (Johansen 1994) Source: result calculated by author.

Just like in Bahrain, Kuwait, exchange rate volatility has a significant positive effect on

crude petroleum production (CPP). Reserve minus gold has a positive and significant impact

on inflation. Exports provide a positive and significant impact on reserve minus gold and

investment. Crude petroleum production has a significant positive impact on investment.

Investment in Kuwait has a positive and significant impact on reserve minus gold and crude

petroleum production. Economic growth provides a significant and positive impact on the

reserve minus gold and investment through the acceleration process.

Table 2 Result of the short-run impact of exchange rate volatility on macroeconomic fundamentals in Kuwait in the 1970-2011 period

Dependent Variables

Independent Variables

∆ER Vol ∆ RES ∆ XPORT ∆ INFLATION ∆ CPP ∆ INV ∆ GDP ECTt-1

∆ER Vol - 1.13327 1.01056 0.22312 0.00260 1.19113 0.78742 -3.88410** (0.29380) (0.32113) (0.63937) (0.95963) (0.28197) (0.38046)

∆ RES 0.91869 - 17.2520*** 0.67835 1.73125 8.86615*** 17.4694*** -4.39352** (0.34388) (0.00018) (0.41530) (0.19613) (0.00504) (0.00017)

∆ XPORT 0.50123 0.07138 - 0.34531 0.05537 0.08149 1.11602 -2.38132** (0.48328) (0.79078) (0.56025) (0.81523) (0.77684) (0.29745)

∆ INFLATION

0.02263 3.41731* 0.61944 - 0.10207 1.77687 0.55654 -3.04837** (0.88122) (0.07231) (0.43614) (0.75111) (0.19047) (0.46025)

∆ CPP 8.73159*** 0.66874 0.01773 0.02969 - 24.7424*** 0.21530 2.45358** (0.00535) (0.41859) (0.89477) (0.86411) (0.0000014) (0.64530)

16

∆ INV 0.01896 0.08196 3.40478* 0.94366 8.05929*** - 6.55483** -2.02926** (0.89121) (0.77621) (0.07281) (0.33748) (0.00723) (0.01456)

∆ GDP 0.23702 1.17873 0.63704 0.00947 0.00031 1.73963 - -3.76506** (0.62916) (0.28445) (0.42974) (0.92301) (0.98605) (0.19508)

Notes : (1) The value in parentheses are the p-value. For ECT, the values in parentheses are t-ratio (2) Asteriks (*), (**), (***) indicate significance at 10, 5, 1 percent level respectively (3) Two cointegrating vectors are incorporated into the VECM analysis since the trace test has some advantages over the maximum eigenvalues test (Johansen 1994) Source: result calculated by author.

In the case of Oman, exchange rate volatility does not affect positively and

significantly on several macroeconomic variables such as reserves minus gold exports,

crude petroleum production, investment and gross domestic product. Unfortunately,

inflation data is not yet available on CD-ROM IFS IMF. Reserve minus gold has a positive

and significant correlation with export at α 1%. Export has a positive and significant

impact on reserve minus gold and economic growth. Crude petroleum production and

significant positive effectat α 10% on exchange rate volatility. Investments had a positive

impact and significant with minus gold reserve, export and economic growth. Economic

growth has a positive and significant impact on the gold reserve at α 1% level.

Table 3 Result of the short-run impact of exchange rate volatility on macroeconomic fundamentals in Oman in the 1970-2011 period

(Lag order 1)

Dependent Variables

Independent Variables

∆ER Vol ∆ RES ∆ XPORT ∆ CPP ∆ INV ∆ GDP

∆ER Vol - 1.49299 1.22776 3.70611* 0.26691 1.71267 (0.22928) (0.27481) (0.06172) (0.60841) (0.19850)

∆ RES 0.07459 - 8.89465*** 0.00662 4.47340** 8.51539*** (0.78624) (0.00497) (0.93559) (0.04104) (0.00589)

∆ XPORT 0.43227 12.5142*** - 0.00446 4.90533** 1.24028 (0.51484) (0.00108) (0.94713) (0.03284) (0.27241)

∆ CPP 0.00067 2.18081 0.76866 - 0.17149 1.49121 (0.97945) (0.14798) (0.38614) (0.68112) (0.22955)

∆ INV 0.36005 0.12201 0.07966 1.62772 - 0.01352

(0.55204) (0.72879) (0.77929) (0.20976) (0.90804)

∆ GDP 0.62988 0.52782 3.15444* 1.46329 12.1123*** - (0.43233) (0.47198) (0.08373) (0.23388) (0.00127)

Notes : (1) The value in parentheses are the p-value. For ECT, the values in parentheses are t-ratio (2) Asteriks (*), (**), (***) indicate significance at 10, 5, 1 percent level respectively (3) Two cointegrating vectors are incorporated into the VECM analysis since the trace test has some advantages over the maximum eigenbalues test (Johansen, 1994) Source: result calculated by author.

In Qatar, like in the United Arab Emirates (UAE), exchange rate volatility does not

affect any macroeconomic fundamentals. Reserve minus gold, exports, inflation, investment

has a significant positive effect on economic growth. Inflation has also a positive and

significant impact on reserve minus gold. Crude petroleum product has a negative effect on

17

some macroeconomic variables such as reserves minus gold, exports, inflation, and

investment. The rate of economic growth has a positive and significant impact on

macroeconomic variables which three reserves minus gold, inflation, investment.

Table 4 Result of the short-run impact of exchange rate volatility on macroeconomic fundamentals in Qatar in the 1970-2011 period

Dependent Variables

Independent Variables

∆ER Vol ∆ RES ∆ XPORT ∆

INFLATION ∆ CPP ∆ INV ∆ GDP ECTt-1

∆ER Vol - 0.56830 0.00073 0.32562 0.00284 0.31643 0.08625 0.25765 (0.4557) (0.9786) (0.5726) (0.9578) (0.5784) (0.7707)

∆ RES 0.96342 - 0.03207 17.1814*** 5.47709** 0.05191 11.8060*** -190814** (0.3329) (0.8588) (0.0003) (0.0246) (0.8215) (0.0015)

∆ XPORT 0.16392 1.21429 - 1.82015 8.59369*** 0.47949 1.66907 27.1226** (0.6879) (0.2776) (0.1881) (0.0058) (0.4946) (0.2048)

∆ INFLATION

0.05484 0.71299 0.70601 - 6.40655** 0.05249 5.33577** 16.9075** (0.8165) (0.4054) (0.4079) (0.0171) (0.8205) (0.0282)

∆ CPP 1.15203 0.00171 1.01086 0.49191 - 0.53842 0.60520 1.24413 (0.2901) (0.9672) (0.3212) (0.4887) (0.4694) (0.4417)

∆ INV 0.38988 0.46242 0.00463 1.68857 5.79354** - 12.0216*** 5.67332** (0.5376) (0.5023) (0.9462) (0.2048) (0.0232) (0.0018)

∆ GDP 0.01279 29.1701*** 7.45687*** 7.16659** 1.81679 79.6710*** - 3.14734** (0.9106) (0.0000004) (0.0098) (0.0121) (0.1861) (0.000000002)

Notes : (1) The value in parentheses are the p-value. For ECT, the values in parentheses are t-ratio (2) Asteriks (*), (**), (***) indicate significance at 10, 5, 1 percent level respectively (3) Two cointegrating vectors are incorporated into the VECM analysis since the trace test has some advantages over the maximum eigenvalues test (Johansen 1994) Source: result calculated by author.

In Saudi Arabia, exchange rate volatility has a positive and significant impact on

crude petroleum production and investment. This is reasonable because Saudi Arabia is the

second supplier of crude oil in the world after Venezuela and most investments are in sectors

Crude oil exploitation. Reserve minus gold, exports and investments have a positive and

significant impact on inflation. Crude petroleum production and significant positive effect on

the three macro-economic variables on exchange rate volatility, inflation and investment.

The rate of economic growth had a positive impact on the reserve minus gold, inflation,

investment.

Table 5 Result of the short-run impact of exchange rate volatility on macroeconomic fundamentals in Saudi Arabia in the 1970-2011 period

Dependent Variables

Independent Variables

∆ER Vol ∆ RES ∆ XPORT ∆ INFLATION ∆ CPP ∆ INV ∆ GDP ECTt-1

∆ER Vol - 0.90226 0.02668 1.23005 4.40035** 0.40185 0.69830 -0.09437 (0.3482) (0.8711) (0.2744) (0.0426) (0.5299) (0.4086)

∆ RES 0.61129 - 8.02616 0.03496 1.39095 1.48989 5.29828** 1.77665 (0.4391) (0.0074 (0.8527) (0.2456) (0.2298) (0.0269)

∆ XPORT 1.09680 0.00063 - 0.08034 0.83373 0.34570 2.97147 0.78564 (0.3018) (0.9801) (0.7784) (0.3671) (0.5601) (0.0931)

∆ INFLATION 2.02633 16.5298*** 11.4856*** - 7.09841** 10.7546*** 10.4158*** -1.51369 (0.1628) (0.0002) (0.0017) (0.0113) (0.0022) (0.0026)

18

∆ CPP 7.32715** 0.06046 0.72098 0.89125 - 0.31676 0.04461 -3.82048** (0.0101) (0.8071) (0.4013 (0.3511) (0.5769) (0.8339)

∆ INV 3.22834* 1.11377 8.79138 0.20769 3.91371* - 10.8280*** 2.48161** (0.0803) (0.2979) (0.0053) (0.6512) (0.0552) (0.0022)

∆ GDP 1.32845 0.36126 1.25952 0.12334 0.25975 0.06117 - 1.27671 (0.2563) (0.5514) 0.2690 (0.7274) (0.6132) (0.8060)

Notes : (1) The value in parentheses are the p-value. For ECT, the values in parentheses are t-ratio (2) Asteriks (*), (**), (***) indicate significance at 10, 5, 1 percent level respectively (3) Two cointegrating vectors are incorporated into the VECM analysis since the trace test has some advantages over the maximum eigenvalues test (Johansen 1994) Source: result calculated by author.

In the United Arab Emirates, reserve minus gold positive and significant impact on

macroeconomic variables namely three on exports, investment and economic growth. Export

has a positive and significant impact on reserve minus gold and economic growth. Crude

petroleum production only has a positive impact on reserves minus gold. Investments have a

positive and significant impact on reserve minus gold and economic growth. While the rate of

economic growth and a significant positive effect on macroeconomic variables namely

reserve minus gold, investment and economic growth.

Table 6 Result of the short-run impact of exchange rate volatility on macroeconomic fundamentals in UAE in the 1970-2011 period

Dependent Variables

Independent Variables ∆ER Vol ∆ RES ∆ XPORT ∆ INFLATION ∆ CPP ∆ INV ∆ GDP

∆ER Vol - 0.24270 0.00298 na 0.04394 0.01848 0.00531

(0.6253) (0.9568) na (0.8351) (0.8928) (0.9423)

∆ RES 0.42982 - 11.0295*** na 3.25164* 6.79316** 18.2521*** (0.5164) (0.0026) na (0.0800) (0.0141) (0.0002)

∆ XPORT 0.01591 7.51968** - na 0.18297 2.42356 13.2708*** (0.9005) (0.0107) na (0.6719) (0.1321) (0.0012)

∆ INFLATION na na na - na na na na na na na na na

∆ CPP 0.87681 1.03040 0.63447 na - 0.36212 0.09091 (0.3550) (0.3170) (0.4320) na (0.5517) (0.7649)

∆ INV 0.00618 6.27457** 1.01366 na 1.61746 - 20.6831*** (0.9378) (0.0179) (0.3237) na (0.2129) (0.000000005)

∆ GDP 0.31111 14.0110*** 8.92102*** na 1.34336 3.97693* - (0.5807) 0.0007 (0.0061) na (0.2545) (0.0550)

Notes : (1) The value in parentheses are the p-value. For ECT, the values in parentheses are t-ratio (2) Asteriks (*), (**), (***) indicate significance at 10, 5, 1 percent level respectively (3) Two cointegrating vectors are incorporated into the VECM analysis since the trace test has some advantages over the maximum eigenvalues test (Johansen 1994) (4) Inflation data are not available Source: result calculated by author.

V. Conclusion

.

In general, in the Gulf Coperation Council Countries (GCC), exchange rate volatility only

affect significant positively on crude petroleum and investment especially in Bahrain, Kuwait,

19

Saudi Arabia. While in Oman, Qatar and the United Arab Emirates, exchange rate volatility does

not affect the macroeconomic fundamentals. In the six of the Gulf Coperation Council Countries

(GCC), the linkage between macroeconomic variables with each other is positive and significant.

None of the negative relationship between one macroeconomic variable with other

macroeconomic variable.

References

Aghevli, B.B., Mohsin, S.K, & Montiel, P.J. (1991), “Exchange Rate Policy in Developing Countries: Some Analytical Issues”, Washington D.C: International Monetary Fund (Occasional Paper Nº. 78). Aliyu, Shehu Usman Rano.2008. “Exchange Rate Volatility and Export Trade in Nigeria: An empirical investigation”, MPRA Paper Nº 13490, October, available on http://mpra.ub.uni-muenchen.de./13490/. Aristotelous, K. 2001. “Exchange Rate Volatility, Exchange Rate Regime and the Trade Volume: Evidence from the UK-US export function (1889-1999). Economic Letter, 72 (1), pp. 87-94. Arize, A.C., Osang, T. & Stottje, D. J. 2000. “Exchange Rate Volatility and Foreign Trade: Evidence from thirteen LDCs. Journal of Business & Economic Statistics, 18 (1), pp. 10-17. Arize, A.C., Malindretos, J. & Kasibhatla, K.M. 2003. “Does Exchange Rate Volatility Depress Export Flow: The case of LDCs. International Advances in Economic Research, 9 (1), pp. 7-19. Bénnasy-Quéré, Agnès, Fonagne, Lionel & Lahreche-Revil, Amina. 2001. “Exchange Rate Strategies in the Competition for Attracting Foreign Direct Investment”. Journal of Japanese and International Economies, 15, pp. 178-198. Bredin, D., Fountas, S. & Murphy, E. 2003. “An Empirical Analysis of Short-run and Long-run Irish Export Function: Does Exchange Rate Volatility Matter?”. International Review of Applied Economics, 17 (2), pp. 193-208. Bredin, Don & Cotter John. 2008. “Volatility and Irish Exports”, Economic Inquiry, Vol. 46 Nº 4, October, pp. 540-560, www3.interscience.wiley.com/cgi-bin/fulltext/120121493/pdf/START Bustaman, Arief & Jayanthakumaran, Kankesu (2006),”the Impact of Exchange Rate Volatility on Indonesia’s Exports to the USA: An application of ARDL Bounds testing procedure”, Working Paper in Economics and Development Studies Nº 200610, December, Padjajaran University. www.equitablepolicy.org/wpaper/200610.pdf; Chakrabarti, T. & Scholnick, B. 2002. “Exchange Rate Expectations and Foreign Direct Investment Flows”. Weltwirtchaftliches Archiv, vol. 138(1), pp. 1-21; Chan, Stephanie L. 2008. “Exchange Rate Pass-Through for Selected Southeast Asian Countries”. DLSU Business & Economics Review 18:2, De La Salle University, Manila, Philippines, pp. 115-126, www.philjol.info/index.php/ber/article/viewfile/796/727 Chit, Myint Moe, Rizov, Marian & Willenbockel, Dirk. 2008. “Exchange rate volatility and Exports: New Empirical Evidence from the Emerging East Asian Economies”, Munich Personal RePec Archive (MPRA) Paper Nº 9014, October, available on http://mpra.ub.uni-muenchen.de./9014/; Choudry, T. 2005. “Exchange Rate Volatility and United Stated Exports: Evidence from Canada and Japan”. Journal of Japanese and International Economies, 19(1), pp. 57-71, www.sciencedirect.com/science?_ob Côté, Agathe. 1994. “Exchange Rate Volatility and Trade: A Survey”, WP 94-5, Bank of Canada, 28p. http://129.3.20.41/eps/it/papers/9406/9406001.pdf. Crockett, Andrew & Goldstein, Morris. 1976. “Inflation under Fixed and Flexible Exchange Rates”. IMF Staff Paper 23, pp. 509-544.

20

De Vita, G & Abbott, A. 2004. “Real Exchange Rate Volatility and US Exports: An ARDL Bounds Testing Approach. Economic Issues, 9(1), pp. 69-78. De Grauwe, Paul and Verfaille, Guy. 1988. “Exchange Rate Variability, Misalignment and the European Monetary System”, in: Misalignment of Exchange Rates: Effects on Trade and Industry, edited by Richard C. Marston, pp. 77-100, Chicago: University of Chicago Press, www.nber.org/chapters/c8055/pdf Doganlar, M. 2002. “Estimating the Impact of Exchange Rate Volatility on Export: Evidence from Asian countries”. Applied Economic Letter, 9(13), pp. 859-863. Doyle, E. 2001. “Exchange Rate Volatility and Irish-UK trade: 1979-1992”. Applied Economics, 33(2), pp. 249-265. Du, H & Zhu, Z. 2001. “The Effect of Exchange Rate Risk on Exports: Some Additional Empirical Evidence”. Journal of Economic Studies, 28(2), pp. 106-121. www.emeraldininsight.com Edwards, Sebastian. 1993. “Exchange Rates, Inflation and Disinflation: Latin American Experience”. NBER Working Paper Series, Nº4320, April. www.nber.org/papers/w4320 Foot, K & Stein, J. 1991. “Exchange Rate and Foreign Direct Investment: An Imperfect Capital Market Approach”. Quarterly Journal of Economics 106, pp. 1191-1217. Frankel, Jeffrey A. 2004. “Lessons from Exchange Rate Regimes in Emerging Economies” in: Monetary and Finance Integration in East Asia. Manila: Asian Development Bank. Goldberg, Linda S. & Klein, Michael. 1998.”Foreign Direct Investment, Trade and Real Exchange Rate Linkages in Developing Countries”, Reuven Glick (ed)., Managing Capital Flows and Exchange Rate: Perspective from the Pacific Basin, Cambridge, UK: Cambridge University Press. Goldberg, Linda S. & Kolstad, Charles D. 1995.”Foreign Direct Investment, Exchange Rate Variability and Demand Uncertainty” International Economic Review, 36 (4), pp. 855-873. Gottschalk, Sylvia & Hall, Stephen. 2008. “Foreign Direct Investment and Exchange rate Uncertainty in South-East Asia”. International Journal of Finance and Economics, 13, pp. 349-359. Husmann, R & Gavin, M (1996), “Securing Stability and Growth in a Shock-Prone Region: The Policy Challenge for Latin America”, IADB Working Paper, Nº 315. International Monetary Fund.1997. World Economic Perspective, Chapter IV, October. Ito, Takatoshi. 2000. “Capital Flow in Asia”, pp. 255-297, in: Capital Flow and the Emerging Economies eds. Edward Sebastian, the University of Chicago Press. Ito, Takatoshi & Sato, Kiyotaka. 2006. “Exchange Rate Changes and Inflation in Post-Crisis Asian Economies: VAR Analysis of the Exchange Rate Pass-Through”, CIRJE-F-406, March. Available on http://www.e.u-tokyo.ac.jp/cirje/research/03research02dp.html Kasman, A, & Kasman, S. 2005. “Exchange Rate Uncertainty in Turkey and its impact on Export Volume”. METU Studies in Development, 32 (1), pp. 41-53. Klein, Michael W & Rosengren, Eric. 1994. “The Real Exchange Rate and Foreign Direct Investment in the United Stated: Relative Wealth vs Relative Wage Effects”. Journal of International Economics 36, pp. 373-389. www.nber.org/papers/w4192.pdf Mac Kinnon, J.G. 1991. “Critical Values for Cointegration Tests”, Chapter 13 in: Long-run Economic Relationships: Readings in Cointegration, R.F. Engle & C.W.J. Granger (editors), Oxford University Press. Mc Kinnon, Ronald I. 2001. “After the Crisis, the East Asian Dollar Standard Resurrected: An Interpretation of High Frequency Exchange Rate Pegging”, Stanford University. Miller, Merton. 1998.“Asian Financial Crisis”, September. Japan and the World Economy, Vol. 10. www.sciencedirect.com/science?_ob Morrissey, Oliver & Udomkerdmongkol, Manop. 2008. “Foreign Direct Investment and Exchange Rates: A case study of US FDI in Emerging Market Countries”. Working Paper, School of Economics, University of Nottingham. www.wider.unu.edu/stc/repec/pdfs/rp2008/rp2008-102.pdf

21

Obstfeld, M (1995), “International Currency Experience: New Lessons and Lessons Exchange Rate Volatility and International Trading Strategy”, Journal of International Money and Finance 10 (June), pp. 292-307. Poon, W.C., Choong, C.K. & Habibullah, M.S. 2005.“Exchange rate volatility and exports for selected East Asian countries”. ASEAN Economic Bulletin, 22 (2), pp. 144-159. Rahmatsyah, T., Rajaguru, G & Siregar, R.Y. 2002. ”Exchange Rate Volatility, Trade and Fixing for Life in Thailand”. Japan and the World Economy, 14 (4), pp. 445-470. Sauer, C & Bohara, A.K. 2001. “Exchange Rate Volatility and Exports: Regional Differences between Developing and Industrial Countries”. Review of International Economics, 9(1), pp. 133-152. Sazanami, Yoko, Yoshimura, Seiji, and Kiyota, Kozo. 2001. “Japanese Foreign Direct Investment Flows to East Asia and the Real Exchange Rate: Lesson from the Asian Financial Crisis”, presented at the conference titled “Regional Development and the Global Economy: European and East Asian Experience, University of Le Havre, Le Havre France, September. Schnabl, Gunther. 2007. “Exchange Rate Volatility and Growth in Emerging Europe and East Asia”. Open Economic Review, 10, 1007/s11079-008-9084-6. www.cesifo-group.de/pls/guestci/download Sukar, A.H & Hassan, S. 2001. “US Exports and Time-Varying Volatility of Real Exchange Rate”, Global Finance Journal, 12(1), pp. 109-119. Urata, Shijiro & Kawai, Hiroki. 2000. “The Determinants of the Location of FDI by Japanese Small and Medium sized Enterprises”. Small Business Economics 15, pp. 79-103. Urata, Shijori & Kiyota, Kozo. 2001.“Exchange Rate Volatility and Foreign Direct Investment”. Summary and Policy Recommendations prepared for the Kobe Project. Zainal, A.A. 2004. “Exchange Rate Pass-Through, Exchange Rate Volatility, and their Impacts on Export: Evidence from Indonesian Data”, Dissertation, Kansas State University. www.linkedin.com/in.arzaempa.

22

Appendice

Table 7 Results of long term impact of the exchange rate volatility on macroeconomic fundamentals during

the period 1970-2011 in Bahrain (lag number at 1)

H0 Maximum Eigen Value Test (2) Trace Test (1)

Ha

MES 95% critical

values Ha Trace statistics 95% critical values

r=0 r=1 74.03420** 33.46 r>1 111.1979** 68.52

r≤1 r=2 16.46811 27.07 r>2 37.16375 47.21

r≤2 r=3 9.951404 20.97 r>3 20.69564 29.68

r≤3 r=4 8.472067 14.07 r>4 10.74424 15.41

r≤4 r=5 2.272171 3.76 r>5 2.272171 3.76

1) MES means maximum eigenvalue statistics; Ha is hypothèse alternative.

2) The VAR order is based on likelihood ratio test and the order of p and q is (1, 1).

3) Asteriks ** indicate significance at 5% level. Source: Result calculated by author.

Tableau 8

Results of long term analysis impact of exchange rate volatility on macroeconomic fundamentals during the periode 1970-2011

In Kuwait (lag number=1)

H0 Maximum Eigenvalue Test (2) Trace Test (1)

Ha

Maximum Eigenvalue Statistics

5% critical value

Ha Trace statistics 5% critical value

r=0 r=1 63.87939** 37.52 r>1 133.6026** 87.31

r≤1 r=2 39.25665** 31.46 r>2 69.72318** 62.99

r≤2 r=3 15.74564 25.54 r>3 30.46653 42.44

r≤3 r=4 9.783956 18.96 r>4 14.72089 25.32

r≤4 r=5 4.936934 12.25 r>5 4.936934 12.25

1) H0 is null hypothesis; Ha is alternative hypothesis.

2) The VAR order is based on likelihood ratio and the order of p and q is (1, 1).

3) Asteriks ** indicates significance at 5% level.

Source: Result calculated by author.

Table 9 Results of the long term impact of the exchange rate volatility on macroeconomic fundamentals during the period

1970-2011 In Oman

(lag number= 1)

H0 Maximum Eigenvalue Test (2) Trace Test (1)

Ha

Maximum Eigenvalue Statistics

5% critical values Ha Trace statistics 5% critical values

r=0 r=1 18.32516 25.54 r>1 32.14718 42.44

r≤1 r=2 11.29383 18.96 r>2 13.82202 25.32

r≤2 r=3 2.528196 12.25 r>3 2.528196 12.25

1) H0 is null hypothesis; Ha is alternative Hypothesis.

2) The VAR order is based on likelihood ratio and the order of p and q is (1, 1).

3) Asteriks ** indicates that significance at α=5%. 4) MES and trace tests indicate no cointegration at both 5% and 1% level

Source: Results calculated by author.

23

Table 10

Results of the long term test impact of the exchange rate volatility on macroeconomic fundamentals during the period 1970-2011

in Qatar (lag number=1)

H0 Maximum Eigenvalue Test (2) Trace Test (1)

Ha MES Test 5% critical

value Ha Trace statistics

5% critical value

r=0 r=1 167.1713** 46.23142 r>1 326.6556** 125.6154

r≤1 r=2 65.46534** 40.07757 r>2 159.4843** 95.75366

r≤2 r=3 45.25764** 33.87687 r>3 94.01894** 69.81889

r≤3 r=4 28.61754** 27.58434 r>4 48.76129** 47.85613

r≤4 r=5 12.06926 21.13162 r>5 20.14375 29.79707

1) MES, Maximum Eigenvalue Statistics; H0, null hypothesis; Ha, alternative hypothesis.

2) The VAR order is based on likelihood ratio and the order of p and q is (1, 1).

3) Asteriks ** indicates significance at threshold α=5%. Source: Results calculated by author.

Table 11 Results of the long term test impact of the exchange rate volatility on macroeconomic fundamentals

during the period 1970-2011 in Saudi Arabia (lag number=1)

H0 0Maximum Eigenvalue Test (2) Trace Test (1)

Ha MES Test 5% critical

value Ha Trace statistics

5% critical value

r=0 r=1 65.34034** 46.23142 r>1 176.6158** 125.6154

r≤1 r=2 45.42016** 40.07757 r>2 111.2755** 95.75366

r≤2 r=3 29.99618 33.87687 r>3 65.85532 69.81889

r≤3 r=4 15.78341 27.58434 r>4 35.85913 47.85613

r≤4 r=5 11.61446 21.13162 r>5 20.07572 29.79707

1) MES, Maximum Eigenvalue Statistics; H0, null hypothesis; Ha, alternative hypothesis.

2) The VAR order is based on likelihood ratio and the order of p and q is (1, 1).

3) Asteriks ** indicates significance at threshold α=5%. Source: Results calculated by author.

Table 12 Results of the long term test impact of the exchange rate volatility on macroeconomic fundamentals

during the period 1970-2011 in United Arab Emirates

(lag number=1)

H0 Maximum Eigenvalue Test (2) Trace Test (1)

Ha MES Test 5% critical

value Ha Trace statistics

5% critical value

r=0 r=1 72.39940** 40.07757 r>1 169.2438** 95.75366

r≤1 r=2 44.58367** 33.87687 r>2 96.84438** 69.81889

r≤2 r=3 27.70782** 27.58434 r>3 52.26071** 47.85613

r≤3 r=4 17.34506 21.13162 r>4 24.55290 29.79707

r≤4 r=5 4.018529 14.26460 r>5 7.207837 15.49471

1) MES, Maximum Eigenvalue Statistics; H0, null hypothesis; Ha, alternative hypothesis.

2) The VAR order is based on likelihood ratio and the order of p and q is (1, 1).

3) Asteriks ** indicates significance at threshold α=5%. Source: Results calculated by author

24