Exchange Rate Volatility and Economic Growth: An ARDL Analysis

Abstract

It has been argued by some empirical researches that exchange rate volatility has a positive effect on exports and economic growth. However, while some empirical researchers have been able to argue for the negative effects of volatility to exports and economic growth and others have been able to argue for positive or no effects at all. However, in this study we examine the impact of exchange rate volatility on economic growth of Pakistan by using annual time series data from 1972 to 2019. In this study we used some econometric techniques to find out the relationship between the variables.The study usedAuto regressive distributed lag (ARDL) to check the relationship among the variables which are under consideration. The results suggested that exchange rate volatility and economic growth have positive and significant relationship in long run and negative and insignificant relationship in short run. ERV, IVA, AVA, SVA had significant impact in the long run but INF, ER had insignificant impact in the long run. Inflation had negative and insignificant impact on economic growth.It is not possible to completely eliminate the exchange rate volatility so the government should adopt efficient macroeconomic policy that minimize the volatility of their respective currency