An empirical analysis of short-run and long-run Irish export functions : does exchange rate volatility matter?

Abstract

We analyse the long-run and short-run relationship between merchandise export volume and its determinants, foreign income, relative prices and exchange rate variability, using the techniques of cointegration and error correction. The model was estimated for Irish exports and sectoral exports SITC 0-4 and SITC 5-8 to the European Union using quarterly data for the period 1979-1992. The sectoral classification corresponds to the exports of mainly indigenous Irish firms and multinationals, respectively. We find that exchange rate volatility has a negative effect on the exports of the multinational sector but no effect on the exports of the indigenous sector in the short run. In contrast, exchange rate volatility has no effect on the exports of the multinational sector but a positive effect on the exports of the indigenous sector and overall exports in the long run. This last result implies that Ireland's participation in the single European currency might have a negative impact on exports of indigenous firms and, as a consequence, overall exports.