Effect of Exchange Rate Volatility and Financial Depth on Manufacturing Export

Abstract

This dissertation aims to explore the relationship of exchange rate volatility and financial depth on manufactured exports in Pakistan for the time frame 1973-2015. Study also aims to explore the effect of financial development in presence of exchange rate shocks. ARDL bound testing approach is used to derive long run relations whereas Error Correction Model has been used for short run analysis. Results reveal that manufactured exports of Pakistan are adversely affected by exchange rate volatility both in short run and long run. Private credit showed a negative relation with exports in short run whereas this relation became positive in long run. The study also explores that the impact of financial depth alone on manufactured exports is positive in long run, but this effect becomes negative in presence of exchange rate volatility. This is due to the reason that there exist semi developed financial markets in the country which cannot absorb the negative impact of exchange rates shocks on the country’s economy.