Exchange Rate Uncertainty and Trade Growth - A Comparison of Linear and Nonlinear (Forecasting) Models



4.1 Two further competitors

4.1.1 No causal relation

From the estimation results presented in the last section one may draw the conclusion that
the true (partial) relation between FX uncertainty and trade is at most weak if it exists
at all. In the latter case the best forecast of trade growth conditional on volatility is just
”Zero” after controlling for remaining explanatory variables by means of partial regression.
For this reason we will also provide forecasting results obtained under the assumption that
trade growth is unaffected by FX uncertainty.

4.1.2 A threshold model

Eyeball inspection of the semiparametric estimates in Figure 1 or Figure 2 suggests for a
few data sets that the slope of ^
k (v) varies over the support of v. Preferring parametric
models relative to the semiparametric approach for the reasons of estimation and forecasting
efficiency one may therefore also employ a basically linear model allowing for a shift in the
slope coefficient or the intercept term. Since volatility clustering is a stylized feature of FX
variations one may regard the relation between trade and volatility to differ across states of
low and high volatility. Such an assumption is straightforward to implement by means of a
dummy variable model,
30 i.e.

ykt = ck + vtkθk + c(k+) + vtkθk(+) I(vtk >0) + εtk .

(16)


In (16) I(.) denotes an indicator variable which is equal to 1 if vkt is positive. Owing to our
practice of adjusting volatility by means of partial regression
vtk = 0 is suitable to separate
states of relatively high and low volatility. In addition, for the vast majority of analyzed
data sets the zero threshold is rather close to the empirical median of
vtk . For the linear
projections in (10) it turns out that the volatility measures
vkt and vkt are highly correlated,
having correlation coefficients of 0.94 on average with an empirical standard deviation of
0.04. If the relationship between volatility and trade growth is stable across alternative
states of volatility the parameters governing threshold effects
c(k+) and θk(+) are not different
from zero. Vice versa, nonlinear dynamics would be indicated if forecasts based on the
threshold specification (16) outperform a linear forecasting scheme.

4.2 The forecasting design

Ex-ante forecasting exercises are performed for the linear specification (11), the semipara-
metric model (12) estimated by means of the local linear estimator (14) and the threshold
model (16). In addition to the latter specifications building on some a-priori assumed rela-
tionship between FX uncertainty and trade growth we will also compare their outcomes with
”unconditional” forecasts of zero implying that there is no relation between the two variables

13



More intriguing information

1. Imperfect competition and congestion in the City
2. The name is absent
3. Multiple Arrhythmogenic Substrate for Tachycardia in a
4. Globalization, Divergence and Stagnation
5. Response speeds of direct and securitized real estate to shocks in the fundamentals
6. The name is absent
7. Improving behaviour classification consistency: a technique from biological taxonomy
8. Business Cycle Dynamics of a New Keynesian Overlapping Generations Model with Progressive Income Taxation
9. The Composition of Government Spending and the Real Exchange Rate
10. The name is absent
11. The name is absent
12. Parent child interaction in Nigerian families: conversation analysis, context and culture
13. The name is absent
14. The Shepherd Sinfonia
15. Constrained School Choice
16. ‘I’m so much more myself now, coming back to work’ - working class mothers, paid work and childcare.
17. Partner Selection Criteria in Strategic Alliances When to Ally with Weak Partners
18. Regional science policy and the growth of knowledge megacentres in bioscience clusters
19. The changing face of Chicago: demographic trends in the 1990s
20. Creating a 2000 IES-LFS Database in Stata