Exchange rate volatility effect in emerging countries : The Chilean manufactures exports case

Abstract

Literature around the world has shown mixed evidence regarding the sign of the effect of volatility exchange rate on exports. This is not only true for the empirical evidence, but also for existing models that attempt to explain the relationship between the two variables. Even so, it has been confirmed that exchange rate volatility could have a greater effect in emerging economies. Using a dynamic panel with quarterly information, this research aims to study the impact of volatility exchange rates on manufactures exports of Chile, an emerging country with an almost perfectly floating exchange rate. According to the results of this research, it is shown that exchange rate volatility in Chile has not damaged manufactures exports, contrary to rudimentary hypotheses made at the start of this research. Rather, it is found that the impact of volatility on exports has been positive and statistically significant in the long-run. Additionally, it is found that the level of the exchange rate and external demand play a key role as determinants of exports, which is in line with the international literature.