The impact of exchange rate volatility on Armenia’s export to Euro area countries

Abstract

This paper empirically investigates the impact of exchange rate volatility on Armenia’s exports to Euro area countries for the period of 2007 Q1 to 2018 Q2. The exchange rate volatility is calculated with the moving standard deviation of the bilateral real exchange rate. Time series data is used for the analysis. An Autoregressive Distributed Lag (ARDL) model is applied for exploring the relationship between exchange rate volatility and export. Estimation results indicate that there exists a negative relationship between exchange rate uncertainty and export flows. A one percent increase in exchange rate volatility in this quarter is predicted to decrease export by 2.8 percentage. The negative relationship between exchange rate uncertainty and export is explained in terms of the risk-aversion of producers. It is expected that risk-averse producers reduce their export flows to foreign countries during the high exchange rate volatility.