Ali Farhan Chaudhry and Ayse Yuce
This paper examines effects of exchange rate volatility proxied by GARCH model on Canadian total exports, exports to the USA, total imports, and imports from the USA and used monthly data from 1997M04 to 2017M08. To estimate long-run relationship ARDL co-integration bound test technique has been used. The results conclude that long-run equilibrium relationship does exist between exchange rate volatility and Canadian total exports, exports from the USA, total imports, and imports from the USA. Further results indicate that exchange rate volatility has a significant inverse long-run relationship with total exports (=-20394705), exports to USA (=-11,195,316), and total imports (=-144,000,000), but an insignificant inverse relationship with Canadian imports from the USA. Further, vector error correction mechanism (VECM) confirms long-run equilibrium relationship between variables. The absolute magnitudes of error correction terms 2.8098, 4.5239, 0.3818, and 0.5306 represent speeds of adjustment for exchange rate volatility, and Canadian total exports, exports to the USA, total imports, and imports from the USA, respectively, in case of any departure from long-run equilibrium. In short term Toda and Yamamoto test finds bi-directional between exchange rate volatility and Canadian total exports, exchange rate volatility and exports to the USA, exchange rate volatility and Canadian total imports, and exchange rate volatility and imports from the USA. Findings of the current study have very important implications for policymakers to design such policies that can establish both short term and long-run equilibrium relationship between exchange rate volatility, exports and imports adjusting short-term exchange rate and trade deficit shocks to avoid violation of international budget constraints.
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