Export Promotion through Exchange Rate Policy: Exchange Rate Depreciation or Stabilization?

Exchange rate movements affect exports in two ways -- its depreciation and its variability (risk). A depreciation raises exports, but the associated exchange rate risk could offset that positive effect. The present paper investigates the net effect for eight Asian countries using a dynamic conditional correlation bivariate GARCH-M model that simultaneously estimates time varying correlation and exchange rate risk. Depreciation encourages exports, as expected, for most countries, but its contribution to export growth is weak. Exchange rate risk contributes to export growth in Malaysia and the Philippines, leading to positive net effects. Exchange rate risk generates a negative effect for six of the countries, resulting in a negative net effect in Indonesia, Japan, Singapore, Taiwan and a zero net effect in Korea and Thailand. Since the negative effect of exchange rate risk may offset, or even dominate, positive contributions from depreciation, policy makers need to reduce exchange rate fluctuation along with and possibly before efforts to depreciate the currency.

Policy Advice during a Crisis

Good policy making is an art. It involves a substantial element of personal judgement about risks and consequences of alternative courses of actions and decisions. It is also a science because it requires systematic gathering and analysis of evidence about a policy issue, and rational assessment of costs and benefits of various ways of addressing the issue. However, in a crisis, there is little time to gather evidence or to search for imaginative solutions to a problem. There is a tendency, in such a situation, to act under pressure rather than on the basis of evidence, analysis or informed judgement. Furthermore, a crisis often creates a situation in which policy makers receive all sorts of advice. This note discusses a set of concepts, originating mainly from economics, that can be used to assess soundness of policy and advice, particularly during a crisis. These are concepts of rationality, sustainability, inclusiveness, feasibility, practicality and tipping, which can be used in decision making in normal and crisis times to reduce risks of disastrous advice or policy.