by Dr. Yaron Zelekha2
Israel is a small and open economy with a high proportion of foreign trade activity relative to output in general and high technology export in particular. Exports to the US,Israel’s largest trading partner, are prominent in this context. Therefore, it is important to understand the variables that determine Israeli exports, as well as the sensitivity of US imports to fluctuations in the exchange rate of the US dollar against the currency of the exporting country.
This study presents a brief description of a theoretical model for testing the effect of export price uncertainty on exports. Using this model, the effect of uncertainty on Israeli exports of goods and services to the US will be tested empirically. The estimation uses a quarterly sample for the period 1995–2007.
The results of the estimation and the model’s relatively high explanatory power support the research hypothesis that export price uncertainty has a negative and dominant effect, which is statistically significant, on Israel’s exports to the US. It was also found, as expected, that the main variables affecting exports in the long run are supply factors (including traditional variables such as relative price, the workforce and local productivity). Therefore, as mentioned, in one part of the literature (including the theoretical model developed in this study) uncertainty is described as a variable with a long-run effect.
For the full text, contact the Chamber.