Exchange rate volatility and cotton producer's behaviour: Evidence from Pakistan

Abstract

This study evaluates the behaviour of Pakistani cotton producer due to exchange rate volatility using the Cobb Douglas production function. The data (1973 to 2018) of different variables collected from various sources. Moving Average Standard Deviation is used to measure the Exchange rate volatility and results confirm the long-run effect of exchange rate volatility on cotton production in Pakistan. For checking the stability of the parameters, cusum and cusumq tests are used and found structural break-through intercept at 1985. The variables, exchange rate volatility, and cotton production have a significant and negative relationship. It shows that the cotton producer in Pakistan has risk-averse behaviour. Another variable, capital-labour ratio has a positive and significant impact on cotton production in Pakistan.