Uncertainty over Exchange Rates and Exports: Evidence from dispersion of expectations as a measure of uncertainty

This paper, using quarterly firm-level survey data, analyzes the time-series property of the exchange rate uncertainty and its relationship with exports. Dispersion of firms' expected exchange rate is used as a proxy for uncertainty. The major findings are as follows. First, uncertainty over exchange rates was enhanced after the Lehman Brothers collapse and after the announcement of the quantitative and qualitative monetary easing policy under Abenomics. Second, dispersion of expected exchange rates has a positive relationship with the volatility of the past exchange rates, but the dispersion does not have predictive power for future exchange rate volatility. Third, expected exchange rates are more dispersed among small and medium-sized enterprises (SMEs) than for large companies. Fourth, we detect some evidence that uncertainty over exchange rates has a negative effect on exports. The estimation result suggests that uncertainty of one standard deviation larger reduces the growth of planned exports by approximately five percentage points. These findings suggest the importance of international cooperation to stabilize exchange rates and the potential role of market intervention when exchange rate uncertainty is enhanced.

This is the English version of the Japanese Discussion Paper (15-J-051) with some additional information and changes.