| Abstract: |
To explain the impact of exchange rate volatility on international trade flows
many empirical studies have investigated. Most empirical findings, which are
primarily concerned with exports, confirm that an increase in exchange rate
volatility tends to generate uncertainty which may have a negative impact on
trade flows. The current study tends to estimate the impact of exchange rate
volatility on demand for bilateral imports for Iran, using bilateral import
data from selected external source of Iran. Although the effectiveness of
import policy depends on the magnitude of each country’s import elasticity
with respect to income, price, exchange rate and volatility of exchange rate,
the current policies might not be more effective unless they meet import
elasticity of particular trading partner countries. Hence, the main objective
of this study is to offer that different policies should be implemented for
trading partners instead of a single trade policy to improve trade balance.
For policy perspective, it is important because trade policies based on
aggregate import elasticity might be deceptive, if bilateral import elasticity
is different from those of aggregate import demand model. (Alam and Ahmad,
2011) There have been numerous studies carried out across the globe focusing
on the relationship between exchange rate volatility and bilateral import. To
the best of our knowledge, there is not any study investigating the
relationship between exchange rate volatility and bilateral import for Iranian
economy. The objective of the present study is to investigate the effect of
exchange rate volatility on Iran’s bilateral import from her selected trading
partner country, Turkey, during 2003Q1 to 2012Q4. The selection of the country
is justified by the fact that Iran’s imports from this neighbor country is
increasing and Turkey is one of Iran's major trading partner countries. On the
other hand, these two countries are planning to come up 30 billion dollars in
their bilateral trade up to 2015. The reason for sample period started from
2003Q1 is approval of equalization in exchange rate. The present empirical
study differs from previous research for Iran in various dimensions. We employ
ARDL approach to detect short-run and long-run impact of exchange rate
volatility on aggregate demand for imports. The paper uses real effective
exchange rate to construct the measure of exchange rate volatility. We also
apply GARCH process for estimating volatility of real effective exchange rate.
Our results show that income elasticity is significant and exchange rate
volatility is negative and statistically significant for Iran’s bilateral
import from Turkey in long run.Our data set covers the period from 2003Q1 to
2012Q4. The Data series of bilateral imports were taken for selected importing
country of Iran namely Turkey which were collected from the IMF's Direction of
Trade Statistics (DOTS). Gross domestic product, consumer price index, unit
value index of import and real effective exchange rate for Iran were compiled
from the IMF's International Financial Statistics (IFS). All real values are
measured on base of year 2005 and all of the series are transformed into
natural log form. Log transformation can trim down the problem of
heteroskedasticity (Gujarati, 2003). The impact of volatility in the exchange
rate on Iran's bilateral imports from selected source is estimated by using
the ARDL approach. This paper does not include all dimensions of dynamic
relationships between Iran's bilateral imports and real effective exchange
rate volatility but limited to the following variables: Dependent variable •
Real bilateral imports is a ratio calculated by dividing the bilateral import
over unit value index of import. Independent variables • Real gross domestic
product is the ratio of nominal gross domestic product to consumer price
index. Expected sign for this variable is positive, because an increase in
real income, increases domestic demand for import. • Relative price of imports
is a ratio calculated by dividing the unit value index of import over consumer
price index. It is expected to find a negative relationship between real
bilateral imports and relative price of imports. • Real effective exchange
rate measures the changes in the competitiveness of a country by taking into
account the changes in the relative prices between the countries involved.
(Pelinescu and Caraiani, 2006). This index is expected to have a positive
relationship with real bilateral imports. • Real effective exchange rate
volatility is a measure that intends to capture the risk faced by traders due
to unpredictable fluctuations in the exchange rate. The study used GARCH
models for this variable. The effect of this variable on the import demand
depends on whether the trader is risk-neutral or risk-adverse.The dynamic
relationship between bilateral import demand for Iran and exchange rate
volatility as well as some important explanatory variables with Turkey has
been examined by applying the ARDL approach, suggesting a long-run
relationship among selected explanatory variables over the sample period for
Iran’s bilateral imports from Turkey. The income elasticity of imports is
positive and significant which indicates that as real income growth occurs in
Iran, it demands more imports from Turkey. The result also shows that relative
price elasticity for bilateral imports significantly and negatively affects
bilateral imports from Turkey, suggesting that import of goods decrease by
increasing import price. The present study also confirms that devaluation has
significant contraction effect on Iran’s bilateral imports. The result further
suggests that exchange rate volatility reduces the demand for Iran’s bilateral
import from selected partner in the long run. This study concludes that short
run disequilibrium converges very soon in the long-run. Finally, for policy
makers, the present study suggests that a single trade policy is not too
effective. Policy makers should make separate policies for neighbor trading
partners, according to their trade relations with Iran and in the light of
present analysis. |