Abstract

As a consequence of the Global Value Chains (GVC), exchange rate and its volatility becomes more important in influencing the output of a country. An interesting question that then surfaced was regarding the paradox of exchange rates that arose in the GVC trend. This study tries to fill the research gap from previous studies, which as far as concerned there is no research directly examined the impact of participation of GVC on output in country level and also quite rare to explore the scope of areas that have certain similarities. This study aims to investigate how the relationship of exchange rate and its volatility on output, and also explores the impact of GVC participation on output. We employed panel data which covers five countries in Asia, including Indonesia, Thailand, Japan, South Korea, and Malaysia, with annual data series through 1990-2015. The analytical method used in this study is the econometric approach with System Generalized Method of Moment (SYS-GMM). The result reveals that, first, the exchange rate volatility has a negative relationship to output. Second, the appreciation of exchange rate is found to increase output significantly. Third, the increase of GVC participation is significantly lead to increase output. Therefore, the impact of exchange rate on output depends very much on the GVC pattern as expected.

Type of Paper: Empirical

Keywords: Exchange rate; exchange rate volatility; global value chains; output; system generalized method moment