Exchange Rate Volatility and Trade Balances in Developing Economies: Evidence from Country-Level VAR and Panel VAR Models

This study examines the influence of exchange rate volatility on trade balances in nine selected developing economies—Türkiye, Brazil, Mexico, Indonesia, Malaysia, Egypt, South Africa, Argentina, and Morocco—during 1995–2024. It investigates the relationship between exchange rate volatility and trade balance while considering key macroeconomic variables, including inflation, real interest rates, and GDP growth. The study is based on major theoretical frameworks, including the Marshall–Lerner condition, J-curve theory, the absorption approach, exchange rate pass-through theory, and risk and uncertainty theory. Country-level Vector Autoregression (VAR) and Panel Vector Autoregression (PVAR) models are employed, supported by Augmented Dickey-Fuller (ADF) tests, impulse response functions (IRFs), forecast error variance decomposition (FEVD), and Granger causality analysis. The findings show that the impact of exchange rate volatility on trade balance differs across countries. In several economies, higher volatility negatively affects trade balance, particularly in countries with greater structural vulnerabilities and high import dependence, while in others the effect remains weak. Panel results suggest that exchange rate volatility generally has a moderate adverse effect on trade balance in developing economies.

The study concludes that exchange rate stability supports trade performance, but lasting trade balance improvement requires structural reforms, sound macroeconomic management, and stronger policy credibility. Key Words: Exchange Rate Volatility, Trade Balance, Developing Economies, VAR, PVAR