Exchange rate nonlinearities in EMU exports to the US

This paper investigates the determinants of bilateral exports to the US for twelve EMU countries. Although export demand functions have been studied for at least seventy years of time, the issue of nonlinearity in export demand equations has been neglected more or less in time series econometrics so far. Accordingly, this paper fills this gap and figures out if exports react to exchange rate changes in a nonlinear fashion. We assume a typical macroeconomic export demand equation that relates exports to the bilateral exchange rate, relative prices and foreign demand. In contrast to previous research, we allow for nonlinearities regarding the exchange rate both in the long- and short-run. To tackle this issue, we apply the newly developed nonlinear ARDL bounds testing approach of Shin et al. (2011) to export data from January 1988-May 2012 obtained from the OECD and the IMF. Precisely, we consider a one and a two threshold case in order to find out if strategic pricing or hysteretic effects are present in EMU exports to the US. Results suggest that disregarding nonlinearities might be too restrictive. In more than 50% of cases, a linear effect of the exchange rate is rejected. Evidence points to the fact that exports react differently to appreciations and depreciations. More precisely, it seems as if exports react stronger to depreciations than to appreciations. Thus, it seems that exporters follow a strategy of strategic pricing in order to gain or maintain market shares. The evidence in favour of hysteretic effects is less convincing.