Does exchange rate volatility hurt domestic consumption? Evidence from emerging economies

Inflation volatility is said to reduce consumption by introducing more uncertainty to consumers who try to allocate their budget toward consumption and saving. Since exchange rate volatility contributes to inflation volatility, it is shown to have direct negative effect on consumption. Previous research established the link between exchange rate volatility and consumption using data from industrial countries. In this paper we provide a counter part by using data from 12 emerging economies. We find that while exchange rate uncertainty has short-run effects on domestic consumption of almost all countries, the short-run effects last into the long run only in half of the countries. Besides theoretical modeling of consumption behavior, the results also have important implications for business cycles and economic growth in emerging economies.