NOMINAL EXCHANGE RATE MISALIGNMENT: IS IT PARTICULARLY IMPORTANT TO AGRICULTURAL TRADE?

This paper examines whether exchange rate misalignment negatively affects agricultural trade, compared to other industry sectors. Nominal exchange rate misalignment is obtained from the percentage deviation of real exchange rates from their long-run equilibrium based on the theory of purchasing power parity. In order to explore this issue, a bilateral trade matrix involving trade flows between 10 developed countries is constructed. Using panel data analysis, a gravity model is estimated for 4 industry sectors over the period 1974-1999. The study finds that over-valuation (under-valuation) of the nominal exchange rate negatively (positively) affects export performance of the agricultural sector in particular. In the large-scale manufacturing sectors considered in this paper, exports are not significantly affected by exchange rate misalignment.