Impact of Exchange Rate Volatility on Trade Balance: Evidence from Pakistan and its Major Trading Partners

Abstract

The present research study examines the response of exchange rate changes on the trade balance of Pakistan with its major trading partners, i.e., the United States, China, United Kingdom, Saudi Arabia, Japan, Germany, Malaysia, and Singapore. Data has been taken from the World Development Indicator and the International Trade Centre for the period 2003 to 2021.

To estimate the data, we applied the Panel Autoregressive Distributed Lags model. The findings of the study show that in the short run, the exchange rate and Consumer Price Index do not seem to have a significant impact on the trade balance, while GDP demonstrates a statistically significant and positive impact on the trade balance.

However, we are more interested in the long-run results showing that exchange rate volatility has significant negative impacts on the trade balance of Pakistan when these countries are involved in trade. Additionally, the long-term trade balance dynamics were influenced by the positive effects of GDP and the negative impact of inflation.