Exchange Rate Uncertainty and Import Demand of Thailand

The impact of exchange rate uncertainty on imports is still controversial because there is no consensus on whether the impact is negative or positive as evidenced from the results of previous studies for both developed and emerging market economies. The present study investigates the impact of real exchange rate uncertainty on import demand of Thailand. The period of study is from July 1997 to December 2011. Exchange rate uncertainty is measured by an AR(1)-EGARCH(1,1) process. In addition, bounds testing for cointeration is employed and the short-run dynamics are analyzed. The results show that all variables are cointegrated. The negative impact of exchange rate uncertainty on Thailand's imports is found. The results also indicate that the presence of higher uncertainty in real effective exchange rate in the short run cannot induce a large number of manufacturing firms to increase or decrease their imports of capital equipment and raw materials so as to hedge against real depreciation in the near future. Even though there is no short-run impact, but the long-run negative impact of real exchange rate uncertainty on real imports is large and highly significant under the floating exchange rate regime. In the long run, a decline in real exchange rate uncertainty can worsen the country's trade balance by slightly causing the demand for aggregate imports to fall, which can harm industrial production in the future. Therefore, stabilization of real effective exchange rate via major nominal exchange rates may deem necessary