The Effect of Exchange Rate Volatility on Import: Evidence From Emerging Markets

Abstract

This study investigates the co-integration relationships among the import, exchange rate volatility, income, and real exchange rate for the emerging market economies during 2000 - 2020. Apart from the previous studies, we consider the cross-section dependency in emerging markets. For the co - integration analysis, Westerlund and Edgerton (2007) co-integration test was used to obtain effective results by allowing autocorrelation and varying variance in the co - integration equation. The findings of this study show that there is a co -integration relationship between the variables. The impact of volatility, income, and real exchange rate on imports are estimated using common correlated effects (CCE). The findings of the panel indicate that long-run imports are significantly impacted negatively whenever there is volatility in emerging markets. It is seen that tastes and preferences are directed towards imported goods, and an increase in income leads to an increase in imports. At the same time findings contradict theoretical projection and shows that an increase in the value of the currency exchange rate has a positive influence on the quantity of goods imported. This could be due to the fact that exports revenue in emerging market countries depend on imports.