An Empirical Analysis of Short-Run and Long-Run Irish Export Functions: Does Exchange Rate Volatility Matter?

We analyse the long-run and short-run relationship between merchandise export volume and its determinants, foreign income, relative prices and exchange rate volatility. The Irish export sector is dualistic, with relatively smaller indigenous firms dominating the more low technology production sectors, while larger subsidiaries of foreign owned multinationals tend to dominate the more high technology sectors. Given the dualistic nature of the Irish export sector, it was considered appropriate to estimate, in addition to a general export function, a separate function for sectors. This allows to draw conclusions about the effect of volatility on different types of enterprises.The model was estimated for Irish exports and sectoral exports SITC 0-4 and SITC 5-8 to the EU using quarterly data for the period 1979-1992. The sectoral classification corresponds to the exports of mainly indigenous Irish firms and multinationals, respectively. We find that the exchange rate volatility has no effect on the volume of trade in the short-run but a significant positive effect in the long run. This is true in the aggregate and for our sectoral classifications. Our results have important policy implications arising from Ireland’s participation in the EMU since the launch of the single European currency on 1 January, 1999. They allow us to tentatively conclude that the decline in intra-EU exchange rate volatility associated with the single currency may lead to a long-run fall in Irish exports to the EU.