Export Growth Dynamics and Real Exchange Rate: Evidence from Armenia

In the light of recently revealed evidence that suggests a weaker impact of exchange rates on trade, this paper empirically studies the link between real exchange rate and exports in the context of a developing country, Armenia, using quarterly data from January 2001 to June 2019. In the course of this analysis, by performing a rolling regression, we confirm the evidence of a subdued impact of exchange rates on exports. We also investigate the effects of exchange rate volatility on exports for Armenia, where exchange rate risk is not generally hedged by exporting firms. Though dozens of studies have examined the effect of exchange rate fluctuations on international trade, the influence of exchange rate volatility is still ambiguous from empirical point of view. Our estimations indicate that short-term exchange rate volatility has no impact on exports. Finally, we study the dynamics of the prolonged overvaluation of exchange rates observed in the economy of Armenia since the early 2000s, which caused a continual deterioration in its external competitiveness. Using the instrumental variable-generalized method of moments (IV-GMM) framework, we estimate a two-stage model for the real effective exchange rate (REER) with endogenous remittances and find evidence of the Dutch disease in Armenia.