Assessing the Dynamic Effects of Oscillations in the Exchange Rate on Commodity-Wise; Trade Flows between Pakistan and Saudi Arabia: Evidence from ARDL Approach

Author

School of Economics, Quaid I Azam University, Islamabad, Pakistan.

Abstract

A plethora of literature on the nexus between exchange rate volatility and trade is available in the context of Pakistan; however, the majority of studies suffer from the exigency of aggregation bias because of using aggregated level data. To tackle the issue of aggregation bias, the current research deploys disaggregated level (commodity-wise) data to explore the effects of oscillations in the exchange rate on bilateral trade between Pakistan and its major trading partner Saudi Arabia. Employing the annual data from 1981 to 2018, ARDL bound testing approach confirms the long-run association among the modeled variables. The application of the ARDL approach reveals the following results. First, exchange rate volatility exhibits dynamic effects on 72% of total exporting industries in the short-run, while this impact reduces to 51% of exporting industries in the long-run. Second, 56% of total importing industries demonstrate a significant response to the volatility in the short-run, while these effects expand to 73% of importing industries in the long-run. Third, the current study's unique finding is that three big industries of exports function coded as 42, 66, and 75 with a share of 35%, 7% & 6%, respectively, enjoying the positive effects of the volatility in the long-run. Also, the current work suggests some appropriate policy recommendations.

Keywords

References

Arif, M., & Chishti, M. (2022). Analyzing the Effectiveness of Fiscal Decentralization in Economic Growth: The Role of Institutions. Iranian Economic Review, 26(2), 325-341.
Aguirre, A., Ferreira, A., & Notini, H. (2007). The Impact of Exchange Rate Volatility on Brazilian Manufactured Exports. Económica, 53, 3-19.
Arize, A. C., Osang, T., & Slottje, D. J. (2008). Exchange-Rate Volatility in Latin America and Its Impact on Foreign Trade. International Review of Economics & Finance, 17(1), 33-44.
Bahmani-Oskooee, M., & Wang, Y. (2007). The Impact of Exchange Rate Volatility on Commodity Trade between the US and China. Economic Issues-Stoke On Trent, 12(1), 31-52.
Bahmani-Oskooee, M., & Mitra, R. (2008). Exchange Rate Risk and Commodity Trade between the US and India. Open Economies Review, 19(1), 71-80.
Bahmani-Oskooee, M., & Hegerty, S. W. (2009). The Effects of Exchange-Rate Volatility on Commodity Trade between the United States and Mexico. Southern Economic Journal, 75(4), 1019- 1044.
Bahmani-Oskooee, M., & Harvey, H. (2011). Exchange-Rate Volatility and Industry Trade between the US and Malaysia. Research in International Business and Finance, 25(2), 127-155.
Bahmani-Oskooee, M., Bolhassani, M., & Hegerty, S. (2012). Exchange-Rate Volatility and Industry Trade between Canada and Mexico. The Journal of International Trade & Economic Development, 21(3), 389-408.
Bahmani-Oskooee, M., Harvey, H., & Hegerty, S. W. (2012). Exchange-Rate Volatility and Industry Trade between the US and Korea. Journal of Economic Development-Seoul, 37(1), 1-20.
Bahmani-Oskooee, M., & Satawatananon, K. (2012). The Impact of Exchange Rate Volatility on Commodity Trade between the US and Thailand. International Review of Applied Economics, 26(4), 515-532.
Bahmani-Oskooee, M., Harvey, H., & Hegerty, S. W. (2013). The Effects of Exchange-Rate Volatility on Commodity Trade between the US and Brazil. The North American Journal of Economics and Finance, 25, 70-93.
Bahmani-Oskooee, M., & Xu, J. (2013). Impact of Exchange Rate Volatility on Commodity Trade between US and Hong Kong. International Review of Applied Economics, 27(1), 81-109.
Bahmani-Oskooee, M., Harvey, H., & Hegerty, S. W. (2014). Exchange Rate Volatility and Spanish-American Commodity Trade Flows. Economic Systems, 38(2), 243-260.
Baek, J. (2014). Exchange Rate Effects on Korea–US Bilateral Trade: A New Look. Research in Economics, 68(3), 214-221.
Choudhry, T., & Hassan, S. S. (2015). Exchange Rate Volatility and UK Imports from Developing Countries: The Effect of the Global Financial Crisis. Journal of International Financial Markets, Institutions and Money, 39, 89-101.
Chishti, M. Z., Iqbal, J, Mahmood, F, & Azeem, H. S. M. (2020a). The Implication of the Oscillations in Exchange Rate for the Commodity-Wise Trade Flows between Pakistan and China: An Evidence from ARDL Approach. Review of Pacific Basin Financial Markets and Policies, 23(4), 1-20.
Chishti, M. Z., Ullah, S., Ozturk, I., & Usman, A. (2020b). Examining the Asymmetric Effects of Globalization and Tourism on Pollution Emissions in South Asia. Environmental Science and Pollution Research, 27, 27721–27737.
Chishti, M. (2020). Analysis of the Nexus between Demographic Changes and Economic Growth in Pakistan: Role of Capital Stock. Iranian Economic Review, 26(3), 489-510.
Dickey, D. A., & Fuller, W. A. (1979). Distribution of the Estimators for Autoregressive Time Series with a Unit Root. Journal of the American Statistical Association, 74(366a), 427-431.
Demez, S., & Ustaoğlu, M. (2012). Exchange-Rate Volatility's Impact on Turkey's Exports: An Empirical Analyze for 1992-2010. Procedia-Social and Behavioral Sciences, 41, 168-176.
Dincer, M. Z., Dincer, F. I., & Ustaoglu, M. (2015). Real Effective Exchange Rate Volatilities Impact on Tourism Sector in Turkey: An Empirical Analysis of 2003-2014. Procedia Economics and Finance, 23, 1000-1008.
Enders, W. (2008). Applied Econometric Time Series. New Jersey: John Wiley & Sons.
Erdal, G., Erdal, H., & Esengün, K. (2012). The Effects of Exchange Rate Volatility on Trade: Evidence from Turkish Agricultural Trade. Applied Economics Letters, 19(3), 297-303.
Hayakawa, K., & Kimura, F. (2008). The Effect of Exchange Rate Volatility on International Trade in East Asia. Economic Research Institute for ASEAN and East Asia (ERIA), ERIA-DP-2008-03, 1-20.
Hussain Javed, Z., & Farooq, M. (2009). Economic Growth and Exchange Rate Volatility in Case of Pakistan. Pak. Journal of Life Social Science, 7, 112-118.
Hall, S., Hondroyiannis, G., Swamy, P. A. V. B., Tavlas, G., & Ulan, M. (2010). Exchange-rate Volatility and Export Performance: Do Emerging Market Economies Resemble Industrial Countries or Other Developing Countries? Economic Modelling, 27(6), 1514-1521.
Humyra Jabeen, B. (2013) Exchange Rate Volatility and Export of Bangladesh. International Review of Business Research Papers, 4(9), 121-133.
Humayon, A. A., Ramzan, S., & Ahmad, F. (2014). Is the Uncertainty in Exchange Rate Hits the Exports in Pakistan? The Journal of Commerce, 3(6), 30-38.
Irandoust, M., Ekblad, K., & Parmler, J. (2006). Bilateral Trade Flows and Exchange Rate Sensitivity: Evidence from Likelihood-Based Panel Cointegration. Economic Systems, 30(2), 170-183.
Jantarakolica, T., & Chalermsook, P. (2012). Thai Export under Exchange Rate Volatility: A Case Study of Textile and Garment Products. Procedia-Social and Behavioral Sciences, 40, 751-755.
Khan, A. J., Azim, P., & Syed, S. H. (2014). The Impact of Exchange Rate Volatility on Trade. The Lahore Journal of Economics, 19(1), 31- 66.
Lotfalipour, M. R., & Bazargan, B. (2014). The Impact of Exchange Rate Volatility on Trade Balance of Iran. Advances in Economics and Business, 2(8), 293-302.
Mustafa, K., Nishat, M., & Kemal, M. A. (2004). Volatility of Exchange Rate and Export Growth in Pakistan: The Structure and Interdependence in Regional Markets [with Comments]. The Pakistan Development Review, 43(4), 813-828.
Nishimura, Y., & Hirayama, K. (2013). Does Exchange Rate Volatility Deter Japan-China Trade? Evidence from Pre-And Post-Exchange Rate Reform in China. Japan and the World Economy, 25, 90-101.
Nicita, A. (2013). Exchange Rates, International Trade and Trade Policies. International Economics, 135, 47-61.
Odili, O. (2015). Real Exchange Rate Volatility, Economic Growth and International Trade in an Emerging Market Economy: Evidence from Nigeria. International Journal of Academic Research in Business and Social Sciences, 5(7), 179-201.
Pesaran, M. H., & Shin, Y. (2002). Long-run Structural Modelling. Econometric Reviews, 21(1), 49–87.
Pesaran, M. H., Shin, Y., & Smith, R. J. (2001). Bounds Testing Approaches to the Analysis of Level Relationships. Journal of Applied Econometrics, 16(3), 289-326.
Ouattara, B. (2004). Modeling the Long Run Determinants of Private Investment in Senegal. Credit Research Paper, 04/05, 1-23.
Rutto, R., & Ondiek, A. (2014). Impact of Exchange Rate Volatility on Kenya’s Tea Exports. International Journal of Economics, Commerce and Management, 2(12), 1-18.
Sekantsi, L. (2009). The Impact of Real Exchange Rate Volatility on South African Exports to the United States (US): A Bounds Test Approach. Journal of Emerging Trends in Economics and Management Sciences, 2(3), 146-155.
Shahbaz, M., Tang, C. F., & Shabbir, M. S. (2011). Electricity Consumption and Economic Growth Nexus in Portugal Using Cointegration and Causality Approaches. Energy Policy, 39(6), 3529-3536.
Serenis, D., & Tsounis, N. (2014). Does Exchange Rate Variation Effect African Trade Flows? Procedia Economics and Finance, 14, 565-574.
---------- (2013). Exchange Rate Volatility and Foreign Trade: The Case for Cyprus and Croatia. Procedia Economics and Finance, 5, 677-685.
Šimáková, J., & Stavárek, D. (2015). The Effect of the Exchange Rate on Industry-Level Trade. Working Papers in Interdisciplinary Economics and Business Research, Retrieved from https://www.iivopf.cz/wp-content/uploads/2020/08/WPIEBRS_01_Simakova_Stavarek.pdf
Situ, J. (2015). The Impact of Real Exchange Rate Volatility on Exports to US: A Comparison between Developed and Export-oriented Less Developed Countries. International Journal of Business and Management, 10(5), 214-221.
Toda, H. Y., & Phillips, P. C. (1994). Vector Autoregression and Causality: A Theoretical Overview and Simulation Study. Econometric Reviews, 13(2), 259-285.
Teng, J., Khan, M. K., Khan, M. I., Chisti, M. Z., & Khan, M. O. (2020). Effect of Foreign Direct Investment on CO2 Emission with the Role of Globalization, Institutional Quality with Pooled Mean Group Panel ARDL. Environmental Science and Pollution Research, 28, 5271-5282.
Ullah, S., Chishti, M. Z., & Majeed, M. T. (2020). The Asymmetric Effects of Oil Price Changes on Environmental Pollution: Evidence from the Top Ten Carbon Emitters. Environmental Science and Pollution Research, 27, 29623-29635.
Ullah, S., Majeed, M. T., & Chishti, M. Z. (2020). Examining the Asymmetric Effects of Fiscal Policy Instruments on Environmental Quality in Asian Economies. Environmental Science and Pollution Research, 27, 38287-38299.
Yan, H. D., & Yang, C. L. (2012). Does an Undervalued Currency Merit Economic Growth? Evidence from Taiwan. Panoeconomicus, 59(1), 37-57.
Iranian Economic Review
Volume 27, Issue 1
May 2023
Pages 17-44

Files

Share

How to cite

Statistics