Exchange Rate Volatility and its Impact on Pakistan's International Trade

The objective of this paper is to analyze the exchange rate volatility and its impact on Pakistan's economy. We used time series data in this study for the period 1970-2014 and it was collected from Economic Survey of Pakistan, State Bank of Pakistan, World Bank and IMF databases. The variables selected for this study include: Real Exchange Rate, Imports, Exports, FDI, GDP, Inflation, Government Spending, money supply and Foreign Reserves. To draw the results, firstly, ADF test was applied on data to check the stationarity problem. Then Co-Integration technique was applied to check whether the variables had long term sustained relationship or not by using simple Least Square Method. Data of 45 entries showed that real Exchange Rate Volatility has positive relationship with Exports, GDP and FDI, while it has negative relationship with imports, foreign reserves, Government spending, inflation and money supply. In the light of results, we recommend that Pakistan should expand its trade with middle income developing countries while using its own currency to avoid uncertainty in Exchange Rates and also provide required fiscal and other incentives to boost its exports.