Asymmetric Effects of the Exchange Rate on the Trade Balance of the Textile Industry in Pakistan
DOI:
https://doi.org/10.61506/01.00493Keywords:
Exchange rate, Trade balance, Textile sector, Linear and Nonlinear ARDLAbstract
This study aims to examine the impact of exchange rate fluctuations on the trade balance of the textile industry in Pakistan. Utilizing data spanning from July 2003 to June 2023, the analysis employs both Linear and Non-Linear Auto-Regressive Distributed Lag (ARDL and NARDL) Bound Testing models to investigate the effects of the real effective exchange rate (REER). Findings reveal a negative relationship between the REER and the trade balance, indicating that an appreciation of the domestic currency relative to a basket of foreign currencies adjusted for inflation results in a deterioration of the trade balance. Moreover, the NARDL model’s estimates indicate that while appreciation of the exchange rate does not significantly affect the trade balance, depreciation has a favorable impact. Notably, the long-term effects of exchange rate changes on the trade balance are more pronounced than the short-term impacts.
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