Modelling Effect of Exchange Rate Voltality on Growth of Pakistani Trade Volume

This study empirically evaluates the impact of exchange rate volatility, foreign direct investment, terms of trade, inflation, industrial production and foreign exchange reserves on Pakistani trade volume over the period of 1975-2010 using quarterly data set. The study employs financial econometrics methods such as Augmented Dickey Fuller (ADF) test GARCH (1, 1) technique and Almon Polynomial Distributed Lag (APDL) models to estimate the relationship of variables. Findings of the study are in accordance with theoretical relationships presented by Clark, Tamirisa, and Wei (2004), Mckenzie (1999), Zilberfarb & Dellad (1993) and Cote (1994). These findings are also in accordance with the empirical studies which support positive relationship of exchange rate volatility and exports presented by Hsu & Chaing (2011), Chit (2008), Feenstra & Kendall (1991), Gerardo & Felipe (2002), and Olugbenga, Onafowora, & Owoyea (2008). Findings of the study in terms of imports are supported by the studies from Lee (1999), Alam & Ahmad (2014) and Adze (1998). The study also recommends some very important policy prescriptions.