1. Adnan, Uzma & Butt Relationship between Exchange Rate, Exports and Imports: Analysis in the form of Co- integration and Bi-Variate Causality. Empirical Evidence from Pakistan. Qazi Muhammad Adnan Hye Uzma Iram & Muhammad. S. Butt 4 th International Conference on Statistical Sciences

2. Adnan, Uzma & Butt 1.0 INTRODUCTION: The present endeavor readdressed currently debated issue, on the relationship between exchange rate, exports, and imports for a developing economy like Pakistan. Relevant literature has observed the substantial but contradictory evidence about the impact of exchange rate volatility on international trade. Those support the hypothesis that volatility of the exchange rate is negatively related with the volume of trade are included Ethier (1973), Hooper and Kohlhagen (1978), Akhtar and Hilton (1984); Cushman (1983, 1986, 1988); Kenen and Rodrick (1986); Pere and Steinherr (1986); Thursby and Thursby (1987); De Grauwe (1988); Koray and Lastrapes (1989); and Arize (1995) Kumar and Dhawan (1991), Broll (1994), Caporale and Dorodioon (1994), Wolf (1995), Dell’Ariccia (1998), Rose (2000), and Vergil (2002).

3. Adnan, Uzma & Butt INTRODUCTION: Whereas some studies found inconclusive impact of exchange rate volatility on export’s growth for developing countries as they have explained variation in exchange rate policies and the level of growth [Bahmani-Oskooee (1984, 1986); and Rana (1983)]. Such evidence further support the view that there is an ambiguity in the role of exchange rate volatility on trade volume.Bahmani-Oskooee (1984,1986) found that exchange rate has a significant impact on trade flows of selected developing countries even in periods when most of them had pegged exchange rates.

4. Adnan, Uzma & Butt For Pakistan impact of exchange rate volatility on the volume of trade has been studied since the late 1970’s when the exchange rate moved from fixed to flexible exchange regime. That high degree of volatility and uncertainty of exchange rate movements since the beginning of the generalized floating in 1973 have led policy makers and researchers to investigate the nature and extent of the impact of such movements on the volume of trade. But a few empirical studies are available in the context of Pakistan. Kumar and Dhawan (1991) estimated the exchange rate volatility on Pakistan exports to the developed world from 1974 to 1985. They found that, volatility of exchange rate adversely effect on export demand 1.0INTRODUCTION:

5. Adnan, Uzma & Butt Khalid and Nishat(2004) investigated the behaviour of exchange rate volatility on exports growth and found that, the volatility of exchange rate has negative and significant effects both in the long run and short run with major trade partners namely UK and US. Similar pattern was observed in case of Australia, Bangladesh, and Singapore, where the volume of trade with Pakistan is comparatively consistent and less volatile. The relationship between exports growth and exchange rate volatility for India and Pakistan is observed only in long run perspective. 1.0INTRODUCTION:

6. Adnan, Uzma & Butt Aim of the Paper The present study has focused on the relationship between exchange rate, exports, and imports rather than the effect of exchange rate. The aim of this study to explores the direction of causality between exchange rate, exports, and imports by employing relatively most recent robust techniques. Data and methodology: The empirical analysis is based on Monthly time series data from 1995 - 2006.The data of X (Exports), M (Imports) and ER (Nominal Exchange rate index) used in this study is taken from the International Financial Statistics (IFS). Exports and Imports are measured in million of rupees at current prices.

7. Adnan, Uzma & Butt Econometric Methodology: F ADF Test F PP Test F JJ-C0-integration Test F VEC F Variance Decomposition Analysis F Standard Granger Causality Test F Error Correction Based Granger Causality Test

8. Adnan, Uzma & Butt Result of Unit Root Table-1 ADF AND PP UNIT ROOT TESTS ( 1995 - 2006 ) VariableAugment Dickey Fuller TestPhillips-Perron Test Level1 st DifferenceLevel1 st Difference X-0.2096(4)-8.21(4)-0.5344( 3)-26.8 (3) M0.862 (3)-6.93 (3)1.582(4)-7.299(4) ER-2.179 (1)-8.626 (1)-2.294 (4)-9.514 (4) Note X = Exports M = Imports ER = Exchange rate (a) The Mackinnon critical values for ADF and PP test statistics are -3.48, -2.89 and -2.58 at 1,5 and 10 percent level of significance, respectively. (b) Figures in square bracket are the number of lags. (c) Lag length selected through Schwartz Criterion

9. Adnan, Uzma & Butt Co-integration Result: Table-2: Johansen Maximum Likelihood Test for Co-integration Max-Eigen Statistic Null HypothesisAlternative Hypothesis Max-Eigen Statistic 5 % critical value Prob. r =0r =127.62745*21.131620.0109 r  1 r=27.53439314.264600.5162 r ≤ 2r=30.0020883.8414660.9600 Trace statistic test Null Hypothesis Alternative Hypothesis Trace - statistic 5 % critical value Prob. r =0r ≥ 135.16393*29.797070.0053 r≤ 1r ≥ 27.53648015.494710.4280 r ≤ 2r ≥ 30.0020883.8414660.9600 Note: *: Significant at the 5% level. Lag length selected through Schwartz Criterion

10. Adnan, Uzma & Butt VEC Table-3: Result of Vector Error Correction D(X)D(M)D(ER) Adj.coefficient -0.573216-0.178772-5.27E-06 Standard Dev. (0.11939) (0.16321) (4.1E-05) t-statistic -4.80114*-1.09536-0.12804 Note: * : Significant at 1%

11. Adnan, Uzma & Butt Variance Decomposition Analysis Table-4: Results of Variance Decomposition Variance Decomposition of X: Period XMER 1100.00000.000000 293.471435.7195880.808986 384.5752413.401852.022909 476.5878020.168883.243320 570.1593425.483104.357564 665.0891629.549425.361415 761.0560132.669236.274768 857.7932235.089177.117612 955.1057036.988937.905378 1052.8546438.496188.649177

12. Adnan, Uzma & Butt Variance Decomposition of M: Period XMER 143.1037856.896220.000000 235.3217464.546930.131332 330.8639868.817130.318881 428.1438471.328680.527475 526.3764172.873710.749880 625.1624473.852360.985198 724.2879974.478501.233505 823.6322174.873131.494660 923.1233875.108461.768157 1022.7170075.229812.053192 Variance Decomposition Analysis Adnan,Uzma & Butt

13. Adnan, Uzma & Butt Variance Decomposition of ER: Period XMER 11.8319170.00687398.16121 21.8177730.06373998.11849 31.8526440.14877497.99858 41.9139000.25532597.83078 51.9900170.37996997.63001 62.0747030.52033197.40497 72.1643200.67441497.16127 82.2566540.84039996.90295 92.3502901.01659096.63312 102.4442781.20140996.35431 Variance Decomposition Analysis Adnan,Uzma & Butt

14. Adnan, Uzma & Butt Impulse Response Function

15. Adnan, Uzma & Butt Table-5 Granger-Causality Test Direction of causalityF-StatisticProbability M→X3.44441*0.00136 X→M2.26573*0.02743 ER→X0.504240.85104 X→ER0.567980.80227 ER→M0.701120.68997 M→ER0.436080.89722 Inference : X →M M →X Bivariate causality between Export and Imports Note: → shows the direction of causality

16. Adnan, Uzma & Butt Table-6 Bi-variate Engle Granger-Causality Based Error correction models Result. S.NOEquationF- Statis tics D(X) F- Statis tics D(M) F- Statis tics D(ER) EC t-1 R2R2 DW 1X=f(M)42.38*---0.218*0.552.15 2M=f(X)-45.22*--0.088**0.532.19 3X=f(ER)1.57---0.1270.272.29 4ER=f(X)--1.97-0.030.111.92 5M=f(ER)-0.883--0.0180.222.32 6ER=f(M)--1.05-0.0310.111.92 Note: *: ** Significant at 1 and 5% respectively. Inference : X →M M →X Bivariate causality between Export and Imports

17. Adnan, Uzma & Butt F 4.0 CONCLUSION AND POLICY IMPLICATIONS : F The present study investigates the query to direction of causality between exchange rate, exports and imports, using Pakistan monthly time series data for 1995.-2006 periods. The results indicate that exports (X) are co integrated with imports (M). F It is thought that negative trade balance can be reversed in the long- run by increasing exports if imported goods bring new technology and a different entrepreneur skill to home country. Therefore, exports and imports are co integrated. F This result is supported by co integration test results (Johansen co integration test has concluded that there is exactly one co integrated vector). Also the variance decomposition result presented relationship between exports and imports since a shock to exports or imports can be explained by exports and imports. There is bi- directional causality has been found between Exports and imports.

18. Adnan, Uzma & Butt F Another result from this empirical investigation is that there is no relationship between exchange rate and trade at current prices. The variance decomposition test states that the power of exchange rate to explain the change in exports and imports is 8.65% and 2.054% respectively after 9-year period. When there is a shock to exchange rate innovations than Exchange rate accounts for the change in itself only. 4 th International Conference on Statistical Sciences