Exchange rate and export nexus

Mohammad Afzal & Sijjad Hussain Shah

Abstract

This paper investigated the responsiveness of exports demand and supply to nominal, real and effective exchange rates over the period 1972-2005. We have used 3SLS that yields estimators with greater asymptotic efficiency than that achieved by the limited-information methods. It has been found that depreciation of the nominal exchange rate is expansionary suggesting the success of devaluation. Liberalization of the trade regime leads to depreciation and its impact is positive on export demand. Effective exchange rate has positive and significant coefficient implying that when an economy is liberalized, export incentives and subsidies assume relatively more importance to promote exports. Depreciation of both nominal and real exchange rates has expansionary effect on the exports supply. The price elasticity of exports supply is positive but not significant suggesting that Pakistan is a price-taker. Keeping in view, low supply price elasticity, exchange rate changes are not the sufficient condition. In addition to exchange rate, other factors also matter. Maintenance of a reasonably realistic exchange rate is expected to help export promotion and will have healthy impact on income distribution and employment.