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Exchange Rate Instability and Trade. The Case of Pakistan


  • M. Ali Kemal



The variations in exchange rate play a vital role in the determination of trade balance. Volatile exchange rate shatters the investor’s and trader’s confidence, and slows down the process of trade, which results in slower growth. In this paper, other market instabilities—such as GDP growth instability in imports equation and agriculture and manufacturing instability in exports equation—have been used with exchange rate instability, and GARCH variance is used to measure it. It is found that the impact of exchange rate instability on exports is positive but insignificant, while the impact on imports is negative and significant.

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  • M. Ali Kemal, 2005. "Exchange Rate Instability and Trade. The Case of Pakistan," PIDE-Working Papers 2005:186, Pakistan Institute of Development Economics.
  • Handle: RePEc:pid:wpaper:2005:186

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    References listed on IDEAS

    1. Hooper, Peter & Kohlhagen, Steven W., 1978. "The effect of exchange rate uncertainty on the prices and volume of international trade," Journal of International Economics, Elsevier, vol. 8(4), pages 483-511, November.
    2. Melvin, Michael & Yin, Xixi, 2000. "Public Information Arrival, Exchange Rate Volatility, and Quote Frequency," Economic Journal, Royal Economic Society, vol. 110(465), pages 644-661, July.
    3. Cushman, David O., 1983. "The effects of real exchange rate risk on international trade," Journal of International Economics, Elsevier, vol. 15(1-2), pages 45-63, August.
    4. Richard Baldwin & Paul Krugman, 1989. "Persistent Trade Effects of Large Exchange Rate Shocks," The Quarterly Journal of Economics, Oxford University Press, vol. 104(4), pages 635-654.
    5. Pozo, Susan, 1992. "Conditional Exchange-Rate Volatility and the Volume of International Trade: Evidence from the Early 1900s," The Review of Economics and Statistics, MIT Press, vol. 74(2), pages 325-329, May.
    6. Paul De Grauwe, 1988. "Exchange Rate Variability and the Slowdown in Growth of International Trade," IMF Staff Papers, Palgrave Macmillan, vol. 35(1), pages 63-84, March.
    7. Gagnon, Joseph E., 1993. "Exchange rate variability and the level of international trade," Journal of International Economics, Elsevier, vol. 34(3-4), pages 269-287, May.
    8. Peree, Eric & Steinherr, Alfred, 1989. "Exchange rate uncertainty and foreign trade," European Economic Review, Elsevier, vol. 33(6), pages 1241-1264, July.
    9. S.M. Naseem & S.K. Qureshi & Rehana Siddiqui, 1998. "Conditions of Teaching and Research in Economics: Some Preliminary Findings," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 37(4), pages 453-478.
    10. Kumar, Ramesh & Dhawan, Ravinder, 1991. "Exchange rate volatility and Pakistan's exports to the developed world, 1974-85," World Development, Elsevier, vol. 19(9), pages 1225-1240, September.
    11. Philippe Bacchetta & Eric van Wincoop, 1998. "Does Exchange Rate Stability Increase Trade and Capital Flows?," Working Papers 98.04, Swiss National Bank, Study Center Gerzensee.
    12. Henry, Olan T & Summers, Peter M, 1999. "The Volatility of Real Exchange Rates: The Australian Case," Australian Economic Papers, Wiley Blackwell, vol. 38(2), pages 79-90, June.
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    Cited by:

    1. Abdul Jalil Khan & Parvez Azim & Shabib Haider Syed, 2014. "The Impact of Exchange Rate Volatility on Trade: A Panel Study on Pakistan’s Trading Partners," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 19(1), pages 31-66, Jan-June.
    2. Gulzar Ali & Zhaohua Li, 2016. "Analyzing the role of Imports in Economic Growth of Pakistan; Evidence from ARDL Bound Testing Approach," International Journal of Academic Research in Business and Social Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Business and Social Sciences, vol. 6(9), pages 19-37, September.
    3. Alam, Shaista & Ahmed, Qazi Masood, 2012. "Exchange Rate Volatility and Aggregate Exports Demand through ARDL Framework: An Experience from Pakistan Economy," Review of Applied Economics, Review of Applied Economics, vol. 8(1).

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