The effects of exchange rate volatility on trade performance in Southern African Development Community countries: Pooled mean group approach

Abstract

The issue of exchange rate volatility on trade has generated a lot of interest among economists since the liberalisation of exchange rates the in the 1970s. Over the past decade studies on exchange rate on trade performance have also been done for small open economies including southern Africa. This study considered annual data over the period 1985 to 2016 for 15 Southern African Development Community (SADC) member states with the utilisation of the pooled mean-group. The dynamic heterogeneous panel regression used allows for the disentangling of both the long-run and short-run dynamics in the data. Findings of the study show that volatility in real exchange rates deter trade performance in SADC countries. On the other hand nominal or official exchange rates volatility improves trade performance. Basing on the evidence obtained from this study, SADC economies, and dynamics in real exchange rates matter the most compared to dynamics in the nominal exchange rates. As such, temporary trade gains may be enjoyed by changes in the nominal exchange rate but the same does not apply when the changes in nominal exchange rate are significantly affecting the real exchange rates dynamics. The implication of these findings is that while exchange rate volatility may have positive effects on trade performance in SADC economies in the short run, in the long run exchange rate volatility discourages trade between SADC countries and the rest of the world. Thus, SADC countries should therefore pursue policies that reduce volatility of their currencies.