Effects of Exchange Risk on Exports in Korea using Poisson Lag Structure Function

This paper presents an empirical study on the effect of exchange rate risk on exports by addressing some of the potential deficiencies in prior empirical work. From the econometric model, we consider two possible methodological contributions to the trade literature. First, we employ an alternative measure for exchange rate risk by using daily exchange rates to construct more accurate monthly volatilities and then using AR(1) and AR(2) forecasts of these monthly volatilities to compute multimonthahead risk. Second, we enhance the dynamic specification of the model by introducing a convenient Poisson lag structure for the distributed lag model. The empirical results demonstrate that, as expected, foreign income affects Korea exports positively and rather quickly, and that exports react more slowly to changes in the real exchange rate. The expected real exchange rate level has the normal positive effect, but real exchange rate risk has a positively significant effect.