**3. Literature Review**

The exchange rate is a key factor that influences the volume and values of exports. Researchers have examined the effect of exchange rates on exports. For example, Hooy et al. (2015) investigated the effect of the Renminbi real exchange rates on ASEAN exports to China. Although the real exchange rate was found to be positively related to ASEAN exports, its effect on disaggregated levels was mixed. The depreciation of the Renminbi real exchange rate had a positive impact on the export of high- and medium-tech finished goods, as well as parts and components, but it had no effect on basic goods or low-tech, resource-based, and primary products. Recently, in a study by Atif et al. (2017), the exchange rate was found to be a stimulating factor of agricultural exports in Pakistan.

Scholars have also assessed the impact of exchange rate changes on exports from a theoretical perspective. On the one hand, the first strand of the theory's hypothesis is that without a mechanism to mitigate exchange rate risks, volatility will cause a decline in the volume of trade. Exchange rate fluctuations will lead to greater uncertainty in transaction costs, triggering a decrease in the volume of trade (Hooper and Kohlhagen 1978). If traders are uncertain how these fluctuations will influence the company's revenue, the volume of trade will decline (Clark 1973). On the other hand, exchange rate volatility may have a positive effect on trade volume. Volatility can boost trade by increasing the firm's value (Sercu and Vanhulle 1992) or by increasing the probability that the trading price might exceed the trade costs (Sercu 1992). De Grauwe (1988) argued that the worst possible outcome seems to be primarily the concern of very risk-averse agents, so they are likely to export more to prevent a drastic decrease in their revenue. It is the extent of risk aversion among agents which determines the effect of volatility. Producers exhibiting even a slight degree of risk aversion will export less as their marginal utility for export revenue declines. Some studies have concluded that the introduction of a capital market would not change the impact of volatility. Viaene and Vries (1992) conceded that without hedging instruments, an increase in exchange rate risks leads to the deterioration of both exports and imports. With the appearance of a forward market, the effects of exchange rate volatility on importers and exporters are on opposite ends of the spectrum, because their roles are reversed.

Empirical studies have investigated the link between exchange rate volatility and exports using aggregated trade data. For example, Asteriou et al. (2016) examined the relationship between exchange rate volatility and trade volume of four different nations—Mexico, Indonesia, Nigeria, and Turkey—with the rest of the world. These authors adopted the autoregressive distributed lag (ARDL) bound testing method to address the long-run association and the Granger causality test to detect the short-run relationship. In the long run, there was a marginally negative association between exchange rate volatility and trade volumes in Turkey, while, in the short run, Indonesia and Mexico experienced a causal relationship between these two variables. In their study, Hsu and Chiang (2011) found a negative effect of exchange rate volatility on trade between the US and 13 of its major trading partners, and this finding was unchanged when the sample size was expanded to 30 countries.

Studies have also focused on disaggregated data at commodity or sector levels. Choudhry and Hassan (2015) reported the importance of exchange rate fluctuations for the UK's imports from Brazil, China, and South Africa using an asymmetric ARDL model. The impact of the global financial crisis on the link between volatility and imports was also taken into consideration. Thus, policymakers should be cautious when making decisions, as any policy actions or trade adjustment programs may have unpredicted outcomes if the exchange rate becomes volatile. Bahmani-Oskooee et al. (2013) investigated the impact of exchange rate volatility on the bilateral imports and exports between Brazil and the US between 1971 and 2010 for more than 100 industries. There were several interesting findings. *First*, a vast number of the selected industries were not affected by exchange rate fluctuations, and the positive links significantly dominated the negative effects. *Second*, volatility had a more significant impact on small industries, which account for a smaller share of the total export value. *Third*, each industry reacted differently in response to volatility: for example, agricultural exports in Brazil were found to be negatively related, while there were no recorded impacts on importing machinery products in the US. Nishimura and Hirayama (2013) provided empirical evidence of the effect of exchange rate volatility on Japan–China trade. The findings illustrate that although the exchange rate variation did not affect Japan's exports to China, it had a negative influence on the reverse direction of trade—exporting from China to Japan—during the reform stage.

Authors have also attempted to investigate the long-run and short-run relationship between exchange rate volatility and trade at industry levels between two countries based on the cointegration analysis and bound testing approach. Typical pairs of countries used in these studies include Malaysia and Thailand (Aftab et al. 2017), Malaysia and Japan (Aftab et al. 2015), Malaysia and China (Soleymani and Chua 2014), Canada and Mexico (Bahmani-Oskooee et al. 2012), and the US and China (Bahmani-Oskooee and Wang 2007). These studies, taken together, support both positive and negative impacts of exchange rate volatility on commodity trade between a country and one of its partners. However, the impact may vary across the partners selected in the analysis. This suggests that the impact of exchange rate volatility on exports should be tested case by case; thus, studies on this issue are always valuable.

It is important to consider impacts at the aggregated level so that policymakers have a general enough picture of the effect of the exchange rate on exports. Nevertheless, using aggregated data can lead to aggregated bias problems: the insignificant price elasticity of one industry could overlap with that of another industry, potentially yielding an insignificant elasticity at the aggregated level (Bahmani-Oskooee et al. 2012). Investigating the issue at the disaggregated level provides more detail on the effect of volatility on exports. Without considering the disaggregated level, it is likely to be difficult for policymakers to ascertain which sectors actually suffer adverse effects of volatility. In this regard, the analysis presented in this paper included both forms of data, rather than a single source. Not only were the aggregated data of the manufacturing sector adopted in the analysis, but the disaggregated data of the manufacturing subsectors were also employed. We aim to add to the literature by investigating a case study of a small open dynamic economy. The aggregated and disaggregated outcomes are expected to supplement one another so that policymakers will have a balanced perspective on this complex effect.

An issue that lacks consistency among researchers is the measure of exchange rate volatility, as there is no universal consensus on the proxy to use in empirical studies. As such, multiple measures have been employed to represent volatility, three of which are widely adopted in empirical studies. The first is the standard deviation of the percentage change in the exchange rate (Chit 2008; Hayakawa and Kimura 2009). The second measure of volatility is the moving average standard deviation (MASD) of the real exchange rate in logarithmic terms (Chit et al. 2010; De Vita and Abbott 2004). The third measure is based on the conditional variance of exchange rates using the generalized autoregressive conditional heteroscedasticity (GARCH) model. While some scholars adopt just one proxy, others have used multiple alternatives as a robustness check. De Vita and Abbott (2004) compared three measures of exchange rate volatility in their study, which examined the effect of volatility on the UK's exports to 14 other European nations. The results indicate that the MASD is likely the optimal volatility measure of total exports and subsector exports from the UK to the whole group of nations studied, while a mix of different alternatives are appropriate for analyzing exports from the UK to each individual country.
