Exchange Rate Volatility and Its Impact on Trade and Inflation: A Case Study of Pakistan and India
Author(s)
Saba Fazal Firdousi , Hasnain Javed , Dragana Ostic ,
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Abstract
This paper empirically and statistically analyzes the exchange rate volatility impact on trade and inflation focusing Pakistan and India and its major trading partners USA and China over past two decades. A panel data analysis from 1990-2010, has been conducted using three different estimation techniques which include ordinary least squares regression, fixed effect estimation, and random effect estimation approach. This paper explores whether exchange rate volatility depresses export volume in comparison to imports. It further constructed a hypothesis that nominal exchange rate variability can have a significant and negative impact on the exchange rate fluctuations. Lastly, this paper concludes that exchange rate volatility has a negative impact on export volume, import volume, and inflation rate.
Keywords
Exchange Rate Volatility, Inflation, Terms of Trade, Gross Domestic Product
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