In line with the economic conditions that countries are subject to, they use foreign trade and monetary policy tools to increase production within the country, encourage domestic production and producers, and ensure growth by accelerating exports and gain a competitive advantage in foreign trade. From a historical perspective, devaluation has been the most widely used monetary policy tool among countries. Resorting to devaluation under the fixed exchange rate regime, countries make various interventions in exchange rates by devaluing their currencies. In today’s conditions, it would be more appropriate to state that countries cause this situation mutually under the flexible exchange rate regime, especially through exchange rate changes or exchange rate volatility. Particularly after the global financial crisis, countries accusing each other of exchange rate manipulation brought these debates back to today’s agenda.

Considering the empirical literature in general, there are studies suggesting that the effects of exchange rate volatility on the trade balance are positive, as well as studies stating that it has a negative effect and even stating that the relationship between them is meaningless and insignificant. In the present study, the period that has not been addressed in the literature will be discussed in a way that can compare both developed and developing country groups, namely G7 and BRICS countries, and the effect of exchange rate volatility on export volume will be examined by panel data analysis. Furthermore, to determine real exchange rate volatility, the Generalised Autoregressive Conditional Heteroscedasticity (GARCH) model was employed in the study, and then panel data analysis was performed.

In the analysis, the effect of real exchange rate volatility, one of the macroeconomic variables affecting the export volume, in other words, the relationship between export and volatility constitutes the limit of our study. Therefore, the real exchange rate volatility is the explanatory independent variable on export volume in the established model. The other independent variables include the real exchange rate index of the countries, the annual growth rate of GDP, foreign direct investment inflows, and weighted average tariff rates applied to the basic product import shares of the trading partner countries. In this study, panel data analysis was performed by establishing two models consisting of the same variables between the years 1990 and 2020 to make a comparative evaluation between G7 countries (Germany, the United States, the United Kingdom, Italy, France, Japan, Canada) and BRICS countries (Brazil, Russia, China, South Africa).

Empirical findings indicate that the real exchange rate and its volatility in BRICS countries are statistically significant and their effect on export volume is negative. In other words, the increase in the real exchange rate and exchange rate volatility leads to a reducing effect on the export volume. Thus, developing countries are adversely affected by exchange rate volatility and exchange rate fluctuations, and their export volumes decrease. When evaluated in terms of the G7, it is observed that the real exchange rate volatility is insignificant, while the real exchange rate is statistically significant. The increase in the real exchange rate decreases the export volume, and this result is the same as that for BRICS. However, it was found that exchange rate volatility did not have a significant effect on export volume in the G7 countries. Furthermore, considering that the percentage increase in the real exchange rate decreases the export volume for both BRICS and G7 countries, it is understood that the export volume decreases in return for the appreciation of the domestic currency, in line with the trade theory in general.

In accordance with the analysis results, while the effect of real exchange rate volatility on export volume in BRICS countries was confirmed, it was understood that real exchange rate volatility did not affect export volume in G7 countries. In other words, developed countries are not as affected by exchange rate volatility as developing countries. In this respect, we can say that while the changes in the exchange rate created by developed countries using monetary policy tools are ineffective on their own export volumes, developing countries are more affected by these changes. Namely, it is obvious that it is appropriate for developing countries, such as Brazil, to react to the monetary policy implemented by developed countries, especially after the global financial crisis.

In developing countries, exchange rate volatility has a negative effect on export volume, reducing the trade volume of these countries, let alone acquiring a competitive advantage. Hence, developing countries are more affected by the volatility in exchange rates and cannot acquire a competitive advantage in commercial terms. Ultimately, it is seen that exchange rate volatility has a trade contraction effect in developing countries. Therefore, to increase international trade, it is recommended that developed countries cooperate with developing countries, particularly when implementing monetary policy decisions.