Exchange Rate Volatility and Trade Flows of Pakistan with Major Trading Partners: Is There an Asymmetric Third-Country Effect?

Parveen Akhtar (), Sana Ullah (), Muhammad Tariq Majeed () and Ahmed Usman ()
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Parveen Akhtar: School of Economics, Quaid-i-Azam University, Islamabad, Pakistan
Sana Ullah: School of Economics, Quaid-i-Azam University, Islamabad, Pakistan
Muhammad Tariq Majeed: School of Economics, Quaid-i-Azam University, Islamabad, Pakistan
Ahmed Usman: Department of Economics, Government College University Faisalabad, Pakistan

Journal of International Commerce, Economics and Policy (JICEP), 2022, vol. 13, issue 03, 1-21

Abstract: In this study, we explored the effect of third-country exchange rate volatility on Pakistan’s trade with the major trading partner e.g., USA, Germany, UK, China, Italy, Spain, France, Japan, and Malaysia. To capture the effect of third-country exchange rate volatility, we used monthly data of exports and imports of Pakistan covering the period from January 1981 to January 2018. We used the NARDL technique to obtain the asymmetric results, which are more applicable in reality due to the difference in traders’ response to increased volatility as compared to when they are dealing with decreased volatility. This technique captured the cointegration in the models. The findings of this study suggest that the volatility of the exchange rate has importance in Pakistan trade. The results revealed that in both short-run and long-run, the third-country effect is found significant in eight export and eight import models. The results of both models revealed that the effects of exchange rate volatility are asymmetric in nature on Pakistan’s trade with major trading partners.

Keywords: Trade flows; exchange rate volatility; NARDL; Pakistan (search for similar items in EconPapers)
JEL-codes: F31 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1142/S1793993322500168

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