As an oil exporting nation Kuwait suffers from the well-known issue called the Resource Curse given the high reliance on oil revenues for economic growth and development. Traditionally research on small open economies such as Kuwait focus on versions of the Solow /Harrod/Domar growth models which are predominantly closed models which focus on exogenous growth issues such as saving ratios and the Solow Residual. For an open economy without core problems on capital accumulation, such as Kuwait, it is interesting to disentangle exchange rate volatility issues from key open economy fundamentals such as GDP growth, trade openness, inward foreign investment and exchange rate issues.
The purpose of this study is to empirically examine the impact of gross domestic product, trade openness and foreign direct investment on the exchange rate volatility of Kuwait. We have used several advanced statistical tools to better estimate different kinds of relationships. Results show that all factors are significant in determining exchange rate volatility.
Key words: exchange rate, volatility, GDP, trade openness
1st Revision: 01/03/2018
- Adeniran, J. O., Yusuf, S. A. and Adeyemi, O. A., 2014. The Impact of Exchange Rate Fluctuation on the Nigerian Economic Growth: An Empirical Investigation. International Journal of Academic Research in Business and Social Sciences. Vol 4, No.8
- Amihud, Y., 1994. Exchange rates and the valuation of equity shares. In T. Amihud and R.M. Levich, Exchange rates and corporate performance. New York: Irwin.
- Arize, A. C, Osang, T. and Slottje, D. J., 2000. ‘Exchange-Rate Volatility and Foreign Trade: Evidence from Thirteen LDC’s’, Journal of Business & Economic Statistics, Vol. 18, pp. 10-17.
- Armstrong, H. W. and Read, R., 1998. ‘Trade and Growth in Small States: The Impact of Global Trade Liberalisation’, The World Economy, Vol. 21, pp. 563-585.
- Bartov, E. and Bodnar, G. M., 1994. ‘Firm valuation, earnings expectations, and the exchange-rate exposure effect’, The Journal of Finance, Vol. 49, pp.1755-1785.
- Bodnar, G. and Gentry, W., 1993. ‘Exchange-rate exposure and industry characteristics: evidence from Canada, Japan and US’, Journal of International Money and Finance, Vol.12, pp. 29- 45.
- Brada, J. C. and Mendez, J. A., 1988. ‘Exchange Rate Risk, Exchange Rate Regime and the Volume of International Trade’, Kyklos, Vol. 41, pp.263-280.
- Brooks, C., 2002. Introductory Econometrics for Finance. Cambridge: Cambridge University Press.
- Caballero, R. J., and Corbo, V., 1989. ‘The Effect of Real Exchange Rate Uncertainty on Exports: Empirical Evidence’, The World Bank Economic Review, Vol. 3, pp. 263-278.
- Campbell, J. Y. and Clarida, R. H., 1987. ‘The Dollar and Real Interest Rates: An empirical investigation’, Carnegie-Rochester Conference Series on Public Policy, Vol. 27, pp. 103-140.
- Chowdhury, A. R., 1993. ‘Does Exchange Rate Volatility Depress Trade Flows? Evidence from error-correction models’, The Review of Economics and Statistics, Vol. 75, pp. 700-706.
- Dickey, D. A. and Fuller, W. A., 1979. ‘Distribution of Estimators for Time Series Regressions with a Unit Root’, Jounral of the American Statistical Association, Vol. 74 , pp. 427-431.
- Djirimu, M. A., Tombolotutu, A. D. and Tuty. F. M., 2000. Exchange Rate Volatility Effect on Macroeconomic Fundamental in the GCC. Journal of Economics and Sustainable Development
- Dominguez, K.M. & Tesar, L.L., 2006. ‘Exchange rate exposure’, Journal of International Economics, Vol. 68, pp.188-218.
- Doyle, E., 2001. ‘Exchange rate volatility and Irish-UK trade, 1979-1992′, Applied Economics, Vol. 33, pp. 249 – 265.
- Ebaidalla, E. M., 2013. Impact of Exchange Rate Volatality on Macroeconomic Performance. Working Paper 789. The Economic Research Forum (ERF).
- Holland, M., Vieira, V. F., da Silva, C. G., and Bottecchia, L. C., 2008. Growth and Exchange Rate Volatility: A Panel Data Analysis. International Journal of Academic Research in Business and Social Sciences August 2014, Vol. 4, No. 8 ISSN: 2222-6990.
- Johansen, S. and Juselius, K., 1992. ‘Testing structural hypotheses in a multivariate cointegration analysis of the PPP and the UIP for UK’, Journal of Econometrics, Vol. 53, pp. 211-244.
- Kazunobu, H., and Fukunari, K., 2008. The Effect of Exchange Rate Volatility on International Trade: The Implication for Production Networks in East Asia. Institute of Developing Economics (IDE), JETRO 3-2-2
- L Mark, N. C., 1995. ‘Exchange Rates and Fundamentals: Evidence on Long-Horizon Predictability’, The American Economic Review, Vol. 85, pp. 201-218.
- McKenzie, M. D., 1999. ‘The Impact of Exchange Rate Volatility on International Trade Flow’, Journal of Economic Surveys, Vol. 13, pp. 71-106.
- Meese, R. A., 1984. ‘Is the Sticky Price Assumption Reasonable for Exchange Rate Models?’, Journal of International Money and Finance, Vol. 3, pp. 131-139.
- Meese, R. A. and Rogoff, K., 1983. ‘Empirical Exchange Rate Models of the Seventies: Do they fit out of sample?’, Journal of International Economics, Vol. 14, pp. 3-24.
- Meese, R.A. and Rogoff, K., 1988. ‘Was It Real? The Exchange Rate-Interest Differential Relation over the Modern Floating-Rate Period’, Journal of Finance, Vol. 43, pp. 933-948.
- P.C. B., 1986. ‘Understanding spurious regressions in econometrics’, Journal of Econometrics, Vol. 33, pp. 311-340.
- Prasad, A. N. and Rajan, M., 1995. ‘The role of exchange and interest risk in equity valuation: A comparative study of international stock markets’, Journal of Economics and Business, Vol. 47, pp. 457-472
- Yule, G. U., 1926. ‘Why Do We Sometimes Get Nonsense Correlations Between Time Series? A Study in Sampling and the Nature of Time Series’, Journal of the Royal Statistical Society, Vol. 89, pp. 1-64.