The Impact of Exchange Rate Volatility on Trade: A Panel Study on Pakistan’s Trading Partners

Abstract

This study investigates the impact of domestic and foreign currency-valued exchange rate volatility on the export and import demand functions with reference to Pakistan’s trading partners. We use GARCH-based exchange rate volatilities and the least-squares dummy variable technique with fixed-effects estimation to measure the volatility impact on both demand functions. The study evaluates a series of exchange rates from 1970:01 to 2009:12 to compare the long-run impact of volatility with that of the short run. The results show that, when Pakistan employed the US dollar as the vehicle currency with its trading partners, volatility discouraged both imports and exports. In contrast, both the import and export demand functions remained unaffected by volatility distortions when Pakistan traded with its developing partners using bilateral exchange rates valued in domestic currency terms. In policy terms, this implies that Pakistan should opt for direct domestic currency when trading with middle- and low-income countries.

The impact of COVID-19 shocks on the volatility of stock markets in technologically advanced countries

“…In this regard, we utilise GARCH models for observing the news elements in the sample time series data. The GARCH models also understand the different types of dynamic behaviours of stock markets due to the good or bad news (Khan et al, 2014).…”

Impact of exchange rate volatility on the commodity trade between Pakistan and the US

“…2 Since Pakistan was one of the 12 countries included among Asian LDCs (Less Developed Countries), one comes to a conclusion that Pakistan's exports are not affected by exchange rate uncertainty. Khan et al (2014) is another panel study that assesses the impact of domestic and foreign-currency valued exchange rate volatility on Pakistan's exports to and imports from 29 partners (see their table CI) to concluded that When the US dollar was used as a vehicle currency, trade flows were adversely affected by volatility. However, when other currencies were considered, trade flows were not affected.…”

Türkiye Ekonomisinde Döviz Kuru Dalgalanmalarının Araba İthalatı ve İhracatına Etkisi: 2001-2018 Dönemi

“…The local and foreign Exchange rates directly affect the real prices of production and goods traded among the nations in the world, as it shows the price paid when every transaction is performed. Similarly, domestic inflation has a vital part in setting the changing prices patterns of tradable goods (Jalil Khan, Parvez, and Shabib, 2014). For the developing nations, the issues concerning trade increase when the external factors appear in the form of "News" or "Shocks" and break the general flow of the international costs paid for the stocks or commodities.…”