The Dynamic Effect of Exchange Rate Risk on Exports

The impact of exchange rate risk on exports has been examined extensively for a variety of industrialized countries. Only few attempts have been done on developing economies. This paper investigates the dynamic effect of exchange rate risk on exports for the developing economy of Taiwan, using GARCH and autoregressive distributed lag techniques. The major results suggest that the time-varying real exchange rate risk adversely affects exports and the impact is not instantaneous but needs time to be felt. Our findings suggest that trade policy actions aimed at stimulating exports are likely to generate overestimated results if policy makers ignore the stability of the foreign exchange market.