Volatility of exchange rate and export growth in Pakistan: The structure and interdependence in regional markets

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 results indicate 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. A 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 the long-run perspective. However, of countries like New Zealand and Malaysia, no empirical relationship is observed between export growth and exchange rate volatility.