EXCHANGE RATE VOLATILITY AND ITS EFFECTS ON SINGAPORE'S EXPORTS

Abstract

Economic theory in the past had focused on the potential effects of uncertainty on economic behaviour. Theoretical models had succeeded m demonstrating that uncertainty thus in deed matter. This is because theoretical analyses of uncertainty generally focused on comparisons of behaviour under complete certainty and under uncertainty. Empirical investigations, on the other hand, had yielded mixed results. The purpose of this Honours Thesis is, therefore, an attempt at establishing a link between uncertainty in Singaore's nominal / real effective exchange rate and its perceived adverse effects on her non-petroleum domestic exports. This uncertainty is caused by the volatile behaviour of the nominal / real effective exchange rate and their volatility is proxied by their respective conditional variances using an Autoregressive Conditional Heteroskedasticity (ARCH) model. Empirical investigation using an econometric model revealed that the effect of Singapore's nominal / real exchange rate volatility on her non-petroleum domestic exports is statistically insignificant.