The Effect of Exchange Rate Volatility on Exports: The Case of Canada’s Exports to United States

The purpose of this study was to examine the effect of real exchange rate volatility between the Canadian dollar and United States (US) dollar on real exports from Canada. The study made use of quarterly data from 1960-2017; over half a century. The GARCH (1, 1) was used to model real exchange rate volatility. After finding the variables were non-stationary with no evidence of co-integration, a Vector Autoregression (VAR) model was used to investigate the short-run relationship in the variables making use of the Granger causality technique and impulse response functions. The results reveal that the effect of exchange rate volatility between the Canadian dollar and the US dollar is of mixed signs, with coefficients that are not statistically significant, thus, exchange rate volatility does not have an effect on the real exports of Canada to the US. In addition, the real exchange rate volatility does not Granger cause real exports. This result contradicts economic theory that predicts a negative effect of exchange rate volatility on exports. However, Tenreryo (2007) and Aristotelous (2001) report the same result in their studies.