Exchange Rate Volatility and Trade Flows in Pakistan

Abstract

This study analyzes the impact of exchange rate volatility on real export volume and trade flows in Pakistan. The purpose of this paper is to determine long run relationship between exchange rate volatility and export growth where the results indicate that real exchange rate volatility has significant and negative impact on exports in both long and short run. Government should take steps to remove uncertainty in exchange rate volatility. At the same time, inflation and real export volume has also inverse relationship indicating that inflation causes decline in the exports in Pakistan making domestic products expensive for the foreigners. Foreign economic activity and real export volume has positive relationship but the impact is not profound to cause a significant change in the production structure of Pakistan. Government should liberalize foreign trade policies to increase exports. Government should introduce those policies which attract the foreign investors.