The Effect of Exchange Rate Volatility on Pakistan’s Bilateral Exports to Major Recipients

The dynamic relationship between bilateral exports demand for Pakistan and exchange rate volatility as well as some selected explanatory variables with six major trading partners’ countries, namely, USA, UK, Japan, Saudi Arabia, Germany and UAE, has been examined during 1982Q1 to 2013Q2. The autoregressive distributed lag (ARDL) bound testing approach suggests a stable long-run relationship among selected explanatory variables over the sample period from Pakistan’s bilateral exports to each of its chosen trading partner except Japan. The result suggests that exchange rate volatility adversely affects the demand for Pakistani exports to USA but it positively affects demand for Pakistani exports to Germany in the long run. The short-run causality analysis of ARDL demonstrates that exchange rate volatility causes demand for Pakistani exports in USA and UK adversely, while in case of Germany it causes positively. For Saudi Arabia and UAE, real effective exchange rate volatility does not affect demand for Pakistani exports in the short run as well as in the long run. The study concludes that different export elasticities for different export recipient countries derived in the present study suggest that a single trade policy will not provide a solution to improve country’s external trade sector.