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Impact of external debt and exchange rate volatility on domestic consumption. New evidence from Pakistan

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  • Ameet Kumar
  • Niaz Ahmed Bhutto
  • Khalid Ahmed Mangrio
  • Muhammad Ramzan Kalhoro

Abstract

This study has examined the impact of external debt and the volatility of exchange rate on domestic consumption in Pakistan by using the yearly data (1980–2014). We apply the bounds testing approach to cointegration and error-correction modeling to check their short run and long-run impact on the domestic consumption. The findings of this study has contributed to the existing literature in two ways: bound test results show that income, interest rate, exchange rate, volatility of exchange rate, and external debt have long-term relationship with domestic consumption and income, interest rate and exchange rate have positive impact whereas exchange rate volatility and external debt have negative impact on domestic consumption in the short run as well as in long run. Moreover, the coefficient of ECMt-1 is significantly negative and it shows that adjustment toward equilibrium from short run to long run takes more than half a year. Consumption is the major component of GDP so policymakers use its determinants to fine-tune the economy. This study proposes that policymakers should consider external debt and exchange rate volatility in devising the monetary policy of Pakistan.

Suggested Citation

  • Ameet Kumar & Niaz Ahmed Bhutto & Khalid Ahmed Mangrio & Muhammad Ramzan Kalhoro, 2019. "Impact of external debt and exchange rate volatility on domestic consumption. New evidence from Pakistan," Cogent Economics & Finance, Taylor & Francis Journals, vol. 7(1), pages 1568656-156, January.
    • Handle: RePEc:taf:oaefxx:v:7:y:2019:i:1:p:1568656
    DOI: 10.1080/23322039.2019.1568656
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    Cited by:

    1. Salah Eddine Salhi & Sara El Aboudi, 2021. "Inflation, External Debt, and Fiscal Mobilization in Morocco: The Transmission Channels of Devaluation and the Inflationary Past," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 11(7), pages 545-562, July.
    2. Okwu, Andy & Akpa, Emeka & Oseni, Isiaq & Obiakor, Rowland, 2020. "Oil Export Revenue and Exchange Rate: An Investigation of Asymmetric Effects on Households’ Consumption Expenditure in Nigeria," MPRA Paper 102080, University Library of Munich, Germany.
    3. Emmanuel Uche & Bisharat Hussain Chang & Lionel Effiom, 2023. "Household consumption and exchange rate extreme dynamics: Multiple asymmetric threshold non‐linear autoregressive distributed lag model perspective," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(3), pages 3437-3450, July.
    4. Salah Eddine Salhi & Sara El Aboudi, 2021. "Inflation, External Debt, and Fiscal Mobilization in Morocco: The Transmission Channels of Devaluation and the Inflationary Past," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 11(7), pages 545-562.

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