The Effects of Exchange Rate Volatility on Exports in COMESA: A Panel Gravity Model Approach

Abstract

In the recent past, exchange rate volatility has become a matter of concern for developing and emerging economies partly due to monetary policy actions of advanced economies and partly due to domestic policy actions. This study examines the effects of exchange rate volatility on exports, using a panel gravity model covering the period 1997 to 2019, to estimate pooled, fixed and random effects models for a panel of 19 COMESA member countries. Applying two alternative measures of exchange rate volatility, empirical results reveal that exchange rate volatility tends to depress both intra and extra-COMESA trade. The results suggest that policy makers in COMESA should not ignore exchange rate volatility when designing trade policies and strategies in member countries. Monetary authorities should strive to stabilize exchange rates by addressing the underlying causes of large, unpredictable and damaging exchange rate fluctuations while cautiously avoiding either further destabilizing the exchange rate or depleting foreign reserve buffers that could result in vulnerability to external shocks. It is also important to develop regional infrastructure like roads, railways and ports to further integrate the region and hence unlock the trade potential for COMESA region.