Does exchange rate volatility harm exports? Evidence from Mauritius

Mauritius is a small island economy, dependent on trade and highly influenced by changes in world demand and currency fluctuations. This paper empirically investigates the impact of real effective exchange rate volatility on the Mauritian export performance from 1975 to 2007. Exchange rate volatility is derived from the moving average standard deviation method since no GARCH effect was obtained. The empirical results based on the ARDL analysis show that real exports are co-integrated with foreign economic activity, real effective exchange rate and volatility of real exchange rate. Our findings reveal that exchange rate volatility has a positive and significant short run effect on exports, whilst in the long run; volatility adversely affects the Mauritian exports. It thus becomes crucial to consider both the existence and the degree of exchange rate volatility for the implementation of appropriate trade policies to improve the country's export performance and trade balance.