exchange-rate volatility, exchange-rate regime, and trade in oic countries
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Exchange-Rate Volatility, Exchange-RateRegime, and Trade in OIC CountriesWai-Ching Poon a & Chee-Wooi Hooy ba Monash University Sunway Campus , Selangor , Malaysiab University Science Malaysia , Penang , MalaysiaPublished online: 05 Aug 2013.
To cite this article: Wai-Ching Poon & Chee-Wooi Hooy (2013) Exchange-Rate Volatility, Exchange-Rate Regime, and Trade in OIC Countries, Journal of Asia-Pacific Business, 14:3, 182-201, DOI:10.1080/10599231.2013.772843
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Journal of Asia-Pacific Business, 14:182201, 2013Copyright Taylor & Francis Group, LLCISSN: 1059-9231 print/1528-6940 onlineDOI: 10.1080/10599231.2013.772843
Exchange-Rate Volatility, Exchange-RateRegime, and Trade in OIC Countries
WAI-CHING POONMonash University Sunway Campus, Selangor, Malaysia
CHEE-WOOI HOOYUniversity Science Malaysia, Penang, Malaysia
The authors examine the impact of exchange rate volatility ontrade in the Organization of the Islamic Conference (OIC) coun-tries from 1995 to 2008 using panel estimations to distinguishdifferences between disaggregate trade, and examine its thresholdeffects. Results reveal that exchange rate volatility generally has sig-nificant negative effect on export and import with lag. However,exports of OIC with flexible exchange rate regime have signifi-cant positive exposure to exchange rate volatility. The authors alsodocument a threshold effect for countries with trade value consti-tutes more than 30% of the real gross domestic product, and theexchange rate volatility becomes significant positive for export butsignificant negative for import with lag.
KEYWORDS exchange rate volatility, exchange rate regime,trade, OIC
Although there have been many studies on trade flows in developed anddeveloping countries, there is little examination of exchange rate volatility toexport and import for members of the Organization of the Islamic Conference
Address correspondence to Wai-Ching Poon, School of Business, Monash UniversitySunway Campus, Jalan Lagoon Selatan, 46150, Bandar Sunway, Selangor, Malaysia. E-mail:Poon.firstname.lastname@example.org
Exchange Rate Volatility and Regimes on Trade in OICs 183
(OIC). Previous studies employed aggregate data on a single OIC countryor a selective of small numbers of OIC countries, but results were mixed.This article aims to fill the gap by examining a more comprehensive studyon the OIC countries collectively to investigate the impact of exchangerate volatility on disaggregate trade flows for 30 OIC nations using panelregression analysis.
Since the breakdown of the Bretton Woods system and the appearanceof floating exchange rates in 1973, there has been substantial literature onthe effects of exchange rate uncertainty on trade volumes, trade flows, andtrade balance. Economic theory is ambiguous on the impacts of increasingexchange rate volatility on trade. There is no consensus on how exchangerate volatility influences international trade. Some economists argue thatexchange rate volatility increases uncertainty and thus discourages trade.In an uncertain trade environment, simple trade-offs between the exchangerate system and trade volume might not be assured. Since the mid-1980s,there has been an inclination toward more flexible exchange rate regimes,and there are conventional beliefs that a pegging system has lower regimedurability and it is more difficult to sustain pegged rates because of thewidespread liberalization and expansion of capital movements, as comparedto developed economies with flexible exchange rate systems. Hence, thereis no simple answer to the question of what exchange rate regime to choose.From Table 1, it is noteworthy that many developing OIC countries peg theirexchange rates to a single currency or to a currency basket; in particular sixare emerging markets (Egypt, Indonesia, Malaysia, Morocco, Pakistan, andTurkey) and one is an advanced country (Kuwait).
Intuitively, emerging markets are more exposed to capital flows thandeveloping economies, and countries with flexible exchange rates are morevolatile than countries with pegged exchange rates (Figure 1). Countries thatuse the pegging system depicted varied exchange rate volatility, rangingfrom 0% to 3.5%, 0% to 16%, and 0% to 4.5% for pegging to the euro, U.S.dollar, and basket of currencies, respectively. Comparatively, exchange ratevolatility for flexible regime countries could be as high as 170%. This couldbe due to a number of factors, including the costs of institutions required tomanage an independent monetary policy and efficient growth of the domes-tic financial market. Pegging to a single currency helps to minimize potentiallarge transaction costs and exchange rate risks, and hence there is low like-lihood of rampant speculation. In terms of trade patterns, it is noteworthythat economies with floating exchange rates typically have higher levels ofinternational trade than economies with pegged exchange rates; in particu-lar, economies with managed float exchange rates typically have somewhathigher trade levels than independent float economies (Figure 2).
Members of the OIC countries are a heterogeneous mix of Islamiccountries that spread across 10 regions and observer groups at variousstages of economic development with different levels of income. Most OIC
184 W.-C. Poon and C.-W. Hooy
TABLE 1 Selected Organization of the Islamic Conference (OIC) Members and TradeContributions to Real Gross Domestic Product (GDP) (2005)
Trade as a Percentage ofReal GDP (%)
YearJoinedOIC 1980s 1990s 2000s
Albania, Republic of (independent float) 1969 0.76 1.19 2.82Algeria, Peoples Democratic Republic of (managedfloat)
1969 3.28 3.00 6.46
Azerbaijan, Republic of (pegged to U.S. dollar-eurocurrency basket)
1969 0.00 2.03 8.88
Bangladesh, Peoples Republic of (pegged to U.S.dollar)
1969 1.76 2.81 4.31
Benin, Republic of (pegged to euro) 1969 2.13 2.49 6.60Brunei Darussalam, Sultanate of (currency boardarrangement)
1969 5.22 7.56 8.75
Burkina Faso (pegged to euro) 1969 1.86 2.04 2.60Cameroon, Republic of (pegged to euro) 1969 2.08 2.49 3.74Chad, Republic of (pegged to euro) 1969 0.91 0.88 3.97Comoros, Union of the (pegged to euro) 1969 2.47 3.40 4.46Cte dIvoire, Republic of (pegged to euro) 1969 3.82 4.25 7.24Egypt, Arab Republic of (independent float) 1969 2.81 2.52 5.06Gabon, Republic of (pegged to euro) 1969 4.60 5.65 8.24Guyana, Republic of (pegged to U.S. dollar) 1969 9.45 16.38 19.28Indonesia, Republic of (managed float) 1969 3.00 3.57 4.87Kazakhstan, Republic of (pegged to U.S. dollar) 1969 0.00 2.08 7.96Kuwait, State of (pegged to currency basket) 1970 4.37 3.47 7.25Malaysia (managed float) 1970 8.03 15.05 18.65Morocco, Kingdom of (pegged to currency basket) 1974 2.63 3.73 6.49Mozambique, Republic of (managed float) 1974 4.63 4.20 6.88Niger, Republic of (pegged to euro) 1974 3.08 2.29 3.58Nigeria, Federal Republic of (managed float) 1975 4.08 3.29 7.56Pakistan, Federal Democratic Republic of(managed float)
1976 2.03 2.37 3.57
Senegal, Republic of (pegged to euro) 1982 4.23 3.68 5.82Sierra Leone, Republic of (pegged to U.S. dollar) 1984 3.73 4.49 9.16Suriname, Republic of (pegged to U.S. dollar) 1992 10.83 12.94 15.20Togo, Republic of (pegged to euro) 1992 3.99 4.06 9.43Tunisia, Republic of (pegged to currency basket) 1994 4.98 7.17 9.09Turkey, Republic of (independent float) 1995 1.36 2.43 5.58Turkmenistan, Republic of (pegged to U.S. dollar) 1995 0.00 6.27 10.32
Notes: Currency regimes for the OIC are in parentheses and are extracted from International MonetaryFund data (2008), Retrieved from: http://imf.or