Currency Exchange Rate Volatility: Consequences on International Trade in Pakistan

Abstract

This study investigates the impact of currency exchange rate volatility on international trade in Pakistan utilizing annual time series data from 1990 to 2022, collected through World Development Indicators (WDI) and Economic survey of Pakistan. The Correlation, ADF unit root test, ARDL bound test and ARDL model techniques have been used to attain the results. The outcomes indicate that there exists strong and moderate correlation between the variables used in the study. Variables used in the study have mixed order of integration and ARDL results portrays that volatility of exchange rate adversely influences international trade in Pakistan. Whereas, the impact of economic growth, population growth rate, inflation rate, and industrialization, appear to be positive statistically significant and expenditures on research and development came out to be insignificant. It is concluded that volatility of exchange rate badly impacts international trade in Pakistan; therefore, policymakers should make the exchange rate stable by using monetary policy tools.