The Exchange Rate Volatility and the Trade Balance: Case of Uzbekistan

In transition economies, exchange rate may fluctuate quite substantially relative to major currencies, and thus, have a strong impact on country’s foreign trade dynamics. This study estimates the effect of exchange rate volatility on the international trade in Uzbekistan duringthe 1999-2009 period. Results show that the real exchange rate volatility has a substantial impact on the exports and imports of the country during the given period. Furthermore, using Johansen’s cointegration framework, we test for the presence of unique cointegrating vectors linking series such as exports (imports), foreign (domestic) income, relative export (import) prices (proxied by real exchange rate) with the volatility of the real exchange rate in the long run. Results show that increases in the volatility of the real exchange rate have significant negative effects on equations of exports and imports in the long-run dynamics. We also observe that improvements in the terms of trade, as represented by declines in the real exchange rate, positivelyaffectexports. Overall, our findings suggest that trade can be further increased as a result of sound macroeconomic policies directed to achieve and maintain a stable real exchange rate. Copyright © 2011 JAEBR