Volatility of Exchange Rate and Export Growth in Pakistan
“Volatility of Exchange Rate and Export Growth in Pakistan: The Structure and Interdependence in Regional Markets”
Khalid Mustafa Assistant Professor Department of Economics, University of Karachi and Mohammed Nishat, PhD Professor and Chairman, Finance and Economics Institute of Business Administration, Karachi
Abstract The study empirically investigates the effect of exchange rate volatility on exports growth between Pakistan and leading trade partners. The countries are selected to determine the bilateral relationship between Pakistan and the other countries under various regional economic blocks such as SAARC, ASEAN, European, and Asia-Pacific regions. Cointegration and Error Correction techniques are used to establish the empirical relationship between exchange rate volatility and exports growth, using quarterly data from 1991:3 to 2004:2. The result indicates that the volatility of exchange rate has negative and significant effects both in the long run and short run with major trade partners namely UK and US. Similar pattern was observed in case of Australia, Bangladesh, and Singapore, where the volume of trade with Pakistan is comparatively consistent and less volatile. The relationship between exports growth and exchange rate volatility for India and Pakistan is observed only in long run perspective. However, of countries like New Zealand and Malaysia no empirical relationship is observed between export growth and exchange rate volatility.
Key words: Exchange Rate, Volatility, Export growth, Regional integration
1. Introduction. The impact of exchange rate volatility on the volume of international trade has been studied intensively since the late 1970’s when the exchange rate moved from fixed to flexible exchange rate, means facing a volatile real exchange rate. The theory says that higher exchange rate volatility will reduce trade by creating uncertainty about future profit from export trade. By using the forward markets and by managing the timing
Khalid Mustafa Assistant Professor Department of Economics, University of Karachi and Mohammed Nishat, PhD Professor and Chairman, Finance and Economics Institute of Business Administration, Karachi
Abstract The study empirically investigates the effect of exchange rate volatility on exports growth between Pakistan and leading trade partners. The countries are selected to determine the bilateral relationship between Pakistan and the other countries under various regional economic blocks such as SAARC, ASEAN, European, and Asia-Pacific regions. Cointegration and Error Correction techniques are used to establish the empirical relationship between exchange rate volatility and exports growth, using quarterly data from 1991:3 to 2004:2. The result indicates that the volatility of exchange rate has negative and significant effects both in the long run and short run with major trade partners namely UK and US. Similar pattern was observed in case of Australia, Bangladesh, and Singapore, where the volume of trade with Pakistan is comparatively consistent and less volatile. The relationship between exports growth and exchange rate volatility for India and Pakistan is observed only in long run perspective. However, of countries like New Zealand and Malaysia no empirical relationship is observed between export growth and exchange rate volatility.
Key words: Exchange Rate, Volatility, Export growth, Regional integration
1. Introduction. The impact of exchange rate volatility on the volume of international trade has been studied intensively since the late 1970’s when the exchange rate moved from fixed to flexible exchange rate, means facing a volatile real exchange rate. The theory says that higher exchange rate volatility will reduce trade by creating uncertainty about future profit from export trade. By using the forward markets and by managing the timing