This paper examines the role of exchange rate volatility in determining real imports. As a robustness check, it further explores the impact of the recent global financial crisis which is a period characterized by heightened exchange rate volatility. More specifically, we investigate the impact of exchange rate volatility on UK real imports from Germany, Japan and the US during the period January 1991–March 2013. In contrast to most studies which focus on bilateral trade, we additionally explore the third country exchange rate volatility effect on UK imports. To capture the nonlinear features which often characterize macroeconomic data, we employ the asymmetric autoregressive distributed lag (ARDL) approach to cointegration. Our results suggest that exchange rate volatility plays an important role and reveal that there is a significant effect of the recent financial crisis on UK imports. This finding is consistent when we test for the third country volatility effect. Finally, we find that there is a significant causal relationship between exchange rate volatility and UK imports both in bilateral tests and in tests which account for the third country exchange rate volatility.
Bibliographical noteWe thank two anonymous referees for several useful comments and suggestions. We also thank the participants of the World Finance Conference 2013 Cyprus, Warsaw International Economic Meeting 2013, International Business Research Conference 2013, Madrid and the International Conference on Global Financial Conference 2013, Southampton UK for useful comments on an earlier version of the paper.
- Real imports
- Exchange rate volatility
- Asymmetric cointegration
- Financial crisis