THE EFFECT OF EXCHANGE RATE FLUCTUATIONS ON TRADE BALANCE OF PAKISTAN

Arshad Ullah Jadoon; Yangda Guang

doi:10.20472/ES.2019.8.1.005

Authors

Arshad Ullah Jadoon Northeast Normal University Changchun China, China Author
Yangda Guang Northeast Normal University Changchun China, China Author

DOI:

https://doi.org/10.20472/ES.2019.8.1.005

Keywords:

Exchange rate, Balance of Trade, Inflation, Money Supply, Exports

Abstract

The main goal of this study is to examine exchange rate fluctuations and their impact on the trade balance in Pakistan. Annual time series data from 1971 to 2016 are used to analyze both short-run and long-run relationships between exchange rate fluctuations and the trade balance. The autoregressive distributed lag (ARDL) approach is employed, and the results reveal that the exchange rate has a positive and significant relationship with the trade balance in both the long run and the short run. Depreciation of the Pakistani rupee against the USD increases exports and ultimately improves the trade balance. Inflation and money supply have a negative and significant relationship with the trade balance in the long run. An excess money supply increases inflation, which reduces exports and consequently worsens the trade balance. The study has policy implications for the government as well as local and foreign investors, suggesting that the government should implement strategies to improve the trade balance and indirectly support economic growth in Pakistan.

Data:
Received: 5 Apr 2019
Revised: 18 May 2019
Accepted: 6 Jun 2019
Published: 20 Jun 2019