Exchange Rate Volatility and Aggregate Exports Demand through ARDL Framework: An Experience from Pakistan Economy

This study estimates the exports demand for Pakistan by employing Autoregressive Distributed Lag model and using quarterly data for the period 1982Q1-2008Q2. The paper seeks to examine the long run as well as short run impact of real effective exchange rate volatility along with foreign real income, relative price of exports and real effective exchange rate on demand for exports. The empirical results reveal that demand for real exports are co-integrated with real foreign income, relative price of aggregate exports, real effective exchange rate and volatility of real effective exchange rate. Real foreign income is found to have a significant positive effect on exports demand, suggests that Pakistan’s aggregate exports demand depend significantly on its trading partner’s income. The relative price of exports carries significant negative coefficient suggesting that increase in relative price of exports may decrease the level of exports demand in the long run. The volatility of real effective exchange rate, has adversely affect the Pakistan’s aggregate exports in the long run. The result further demonstrates that real effective exchange rate volatility and relative price of exports ranger causes aggregate exports in the short run.