Doctoral Dissertations
Date of Award
8-1991
Degree Type
Dissertation
Degree Name
Doctor of Philosophy
Major
Agricultural Economics
Major Professor
Gregory K. Pompelli
Committee Members
Larry VanTassell, William Park, Don Clark
Abstract
Nominal and real exchange rate variability has been theoretically associated with increased risk that reduces the volume of internationally traded goods. This study examined the effects of nominal and real exchange rate variability on the volume of grains imported by developing countries.
A variant of Hooper and Kohlhagen's model was used to investigate nominal exchange risk. The model was modified to incorporate and test the effects of a budget constraint on import decisions in developing countries. It was assumed that unpredictable fluctuations of nominal exchange rates were the only source of uncertainty. It was shown that an increase in the nominal exchange rate uncertainty reduced the volume of imported grains, while a relaxation of the nominal budget constraint increased the quantity of imported grains.
The effects of real exchange rate uncertainty were examined by incorporating a budget constraint into the model developed by Cushman. The model assumed that both prices and exchange rates were random and, thus, the uncertain variable of the model was the real exchange rate. An increase in either the expected value of the real exchange rate or in the uncertainty associated with this variable led to a decline in the level of imported grains. However, a relaxation of the real budget constraint increased the quantity of imported grains.
The import demand models under nominal and real exchange rate uncertainty were estimated for quarterly quantities of wheat and corn imported by Brazil, and Trinidad and Tobago. In most cases, empirical results indicated that agricultural commodities were sensitive to either nominal or real exchange rate risk. The inclusion of a financial constraint proved to be important in the case of Trinidad and Tobago. In the case of Brazil, the results were far from conclusive, because the selected foreign exchange approximation did not accurately capture the expected positive effects of an increase in the level of foreign exchange on the imported quantity. Despite this problem, the results indicate that nominal foreign exchange had a small but significant role in explaining Brazilian wheat imports.
To study the potential sources of real exchange rate variability, the model developed by Edwards was used. This model assumed that both monetary and real disturbances affected real exchange variability in the short-run, while only real shocks were relevant in the long-run.
Quarterly models of the potential sources of a short-run and a longer-run measure of the real effective exchange rate variability relevant for corn and wheat importers were developed for Brazil, and Trinidad and Tobago. For both countries, the empirical equations using the short-run measure of real exchange variability performed better than the equations using the long-wave measure. For Trinidad and Tobago, the results showed the influence of both monetary and real factors. In the case of Brazil, the results showed that monetary factors were the more influential factors determining volatility of the real exchange rate.
Recommended Citation
Soto-Urbina, Ligia María, "The effects of exchange rate risk on agricultural imports of developing countries. " PhD diss., University of Tennessee, 1991.
https://trace.tennessee.edu/utk_graddiss/7563