The Effect of Real Exchange Rate Variability on Industrial Output: Empirical Evidence from OIC

The exchange rate plays an essential role for firms which export goods and import raw materials. In this paper, the effects of real specific exchange rate fluctuations in imports, exports and aggregate trade on industry sector, chemical and transportation industries outputs in 49 OIC countries were investigated by using a panel data model over 1990-2014. Particularly, this paper presents evidence on the impact of industry specific real exchange rate indices, using the method developed by Goldberg (2004) on production in each of the specific OIC industries. The results show that the effects of specific real exchange rate and aggregate exchange rate are different. In fact, there is a significant and positive relationship between specific real exchange rate and industrial production in Islamic countries, but this relationship is negative for aggregate index.  Keywords: Industry Specific Real Exchange Rate Index, Bilateral Real Exchange Rate, OIC. JEL Classification: C23, E02, N10.