Discussion Paper

No. 2008-29 | October 01, 2008
The Effects of the Real Exchange Rate Volatility and Misalignments on Foreign Trade Flows in Uzbekistan


This study documents a quantitative analysis of exchange rate volatilities and misalignment in Uzbekistan for the period of 1994q3–2005q2. The results suggest that the real exchange rate volatility and misalignment have depressing effects on the volume of trade, mainly exports in Uzbekistan. The Government’s currency rationing policy was lessening the volatility proving that the policy-induced changes in exchange rate has a stabilizing effect on trade flows. The implied elasticity for the most significant real exchange rate volatility coefficient is –0.20. Using a two-step Engle-Granger technique import demand and export supply price elasticities are computed. The results are consistent with the predictions from a number of previous studies, and in particular, the estimated exports price elasticity for Uzbek economy ranges from 1.65 to 1.84, while import demand price elasticity is between –0.78 and –0.83. At the same time, relatively lower elasticity during “the currency rationing” period indicate that large devaluations, most likely, did not generate the expected improvements in the overall export performance.

Submitted as Policy Paper

JEL Classification

C32 F41

Cite As

Ulugbek Olimov and Nishanbay Sirajiddinov (2008). The Effects of the Real Exchange Rate Volatility and Misalignments on Foreign Trade Flows in Uzbekistan. Economics Discussion Papers, No 2008-29, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2008-29


Comments and Questions

Anonymous - Referee Report
October 16, 2008 - 11:51

see attached file

Anonymous - Invited Reader
October 27, 2008 - 05:24

Comments on Olimov and Sirajiddinov, The Effects of Real Exchange Rate Volatility and Misalignments on Foreign Trade Flows in Uzbekistan

This paper provides an interesting analysis of the impacts of exchange rate volatility and misalignment on the exports and imports for Uzbekistan. The sample period under investigation includes a ...[more]

... period of restrictions on currency convertibility, and then a series of policy moves towards full convertibility, and as such the topic and investigation is of policy relevance.

The focus of these comments is on some additional econometric refinements that could be undertaken to further establish the robustness of the results:

1. The summary statistics for the volatility measures reported in 2 shows a large difference between the estimated level of volatility from the ARCH model as compared to the standard deviation model and a GARCH in mean model. This is an interesting result that should be noted. While the average magnitude of the volatility measures is different it might be that their changes from period to period are more closely related, a calculation of their correlation measures would be interesting. In addition the goodness of fit of the volatility measures could be explored by analyzing the standardized residuals to check on their properties.

2. The findings on the significance of the terms of trade (tot) measure are mixed. One should rule out that this is not due to the construction of the measure which is given on page 14. A justification could be provided for the proxying by using cotton and gold prices, by explaining their importance in the trade of Uzbekistan and whether their relative importance has changed over time.

3. The magnitude differences in the volatility measures from the ARCH model are then reflected in the parameter estimates in table 8 for the volatility parameter. However this is not just a magnitude switch as the estimated parameter is insignificant in the ARCH measure. This suggests that the simple ARCH(1) model may not be capturing the structure in the volatility.

Ulugbek Olimov - Reply to Referee Report and Reader Comment
November 25, 2008 - 08:36

1. The referee report. In general, we accept the referee’s suggestions with regard to structure of the paper. Particularly, we agree that the paper needs to be restructured, and some sections should be either revised (including introduction, sections 4 and 5) or excluded (e.g.
section on literature review). Based ...[more]

... on suggestions, we propose a new and simple structure that mainly consists of the following sections:

Section 1: Introduction (revised, shortened and more focused on the topic)

Section 2: Exchange rate volatility and misalignment

Section 3: Exchange rate and trade flows

Section 4: Conclusions

Annexes: Technical notes

2. The reader comments. I suppose to take into account all three comments made by an anonymous reader that are mostly about econometric minor changes.

I would like to thank all anonymous readers for their comments and suggestions.