Exchange Rate Volatility and Pakistan's Exports

8/10/2019 Exchange Rate Volatility and Pakistan's Exports

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World Development V ol. 1% No . 9, pp. 1225-1240, 1991. 11305-750X/91 $3./10 + 11.00

Pr in t ed i n Gre a t Br i t a in . 199 l Pe rgam on Press p l c

Exchange Rate Volat i l i ty and Paki s tan s Export s

to th e D e v e l o p e d W o r ld , 1 9 7 4 - 85

R A M E S H K U M A R

University o f Waterloo Wa terloo

and

R A V I N D E R D H A W A N

University o f Con necticut Storrs

S u m m a r y . - - T h e p a p e r a t t e m p t s t o e s t i m a t e t h e i m p a c t o f e x c h a n g e r a t e u n c e r t a i n t y o n

Pak i s t an ' s e xpor t s t o t he deve lop ed wo r ld fo r 1974-85 , d i scove r ing s t rong ev idence t o sugges t

t ha t expor t s were adve rse ly a f fec t ed by the i nc reased va r i ab i l i t y o f i t s b i l a t e ra l exchange ra t e s .

Unl ike much o f t he recen t ev idence on deve loped coun t r i e s , howeve r , i t i s t he wl r i ab i l i t y i n

nom inal ra ther than rea l exch ange ra tes tha t is s igni ficant . Th e com puta t ions a lso suggest the

pre sence o f s t rong th i rd -coun t ry e f fec t s .

1. I N T R O D U C T I O N

M a n y a n a l y s ts o f i n t e r n a ti o n a l e c o n o m i c s c o n -

c u r t h a t t h e g e n e r a l i z e d f l o a t i n g o f e x c h a n g e

r a t e s i n o p e r a t i o n n o w f o r a t l e a s t 1 5 y e a r s h a s

e n g e n d e r e d s u b s t a n t i a l v o l a t i li t y i n b o t h t h e

n o m i n a l a n d r e a l e x c h a n g e r a t e s fo r d e v e l o p e d

a n d d e v e l o p i n g c o u n t r i es . ~ W h a t r e m a i n s c o n -

t r o v e r s i a l , h o w e v e r , i s w h e t h e r t h is i n c r e a s e d

v a r i a b i l it y o f th e e x c h a n g e r a t e s , b e i n g i n d i c a t i v e

o f th e g r e a t e r r is k a n d u n c e r t a i n t y i n i n t e r -

n a t i o n a l t r a n s a c t i o n s , h a s h a d a n e g a t i v e e f f e c t

o n t h e v o l u m e a n d v a l u e o f i n t e r n a ti o n a l t r ad e

f l o w s , t h e r e b y c o n t r i b u t i n g t o t h e s l o w d o w n i n

t h e g r o w t h o f i n te r n a t i o n a l t r a d e o b s e r v e d d u r i n g

t h e 1 9 80 s. N o t w i t h s t a n d i n g t h e g r e a t e r d e g r e e o f

a g r e e m e n t i n t h e m o r e r e c e n t e m p i r i ca l e v i-

d e n c e , t h e e m e r g e n c e o f a c o n s e n s u s o n t h e i s s ue

i s i m p e d e d b y th e l a c k o f a n a p p r o p r i a t e t h e o r e t i -

c al f r a m e w o r k i m p l y i n g u n a m b i g u o u s l y t h a t

t r a d e w o u l d i n d e e d b e n e g a t i v e l y a f f e c t e d , 2 t h e

i n a d e q u a c y o f t h e e m p i r i c a l m e a s u r e s o f r i sk , 3

a n d t h e u n a v a i l a b i l i t y o f s u f f i c ie n t , r e l i a b l e d a t a .

T h e p r o b l e m o f r e li a b l e d a t a i s e s p e c i a l ly i m p o r -

t a n t in u n d e r s t a n d i n g w h y m o s t o f t h e e v i d e n c e

t o d a te p e r t a i n s t o t h e d e v e l o p e d c o u n t r i e s , e v e n

t h o u g h t h e a d v e r s e e f f e c t s o f e x c h a n g e r a t e

v o l a t i li t y a r e l i k e ly t o b e s t r o n g e r f o r t h e i n t e r -

n a t i o n a l t r a d e o f d e v e l o p i n g c o u n t r ie s . *

T h e o b j e c t i v e o f t h is p a p e r i s t o a d d t o t h e

r e l a t i v e l y s m a l l s t o c k o f e v i d e n c e o n t h e i s s u e in

t h e c o n t e x t o f d e v e l o p i n g c o u n t r i e s b y a n a l y z in g

t h e i m p a c t o f e x c h a n g e r a t e v a r i a b i l i ty o n P a k i s -

t a n ' s e x p o r t s t o i t s m a j o r t r a d i n g p a r t n e r s i n t h e

d e v e l o p e d w o r ld , W e s t G e r m a n y , J a p a n , t h e

U n i t e d S t a t e s , a n d t h e U n i t e d K i n g d o m f o r

1 9 7 4 -8 5 . W h i l e P a k i s t a n ' s e x p o r t s t o t h e s e f o u r

c o u n t r i e s c o v e r n o m o r e t h a n h a l f o f it s t o t a l

e x p o r t s , t h e y a c c o u n t f o r m o s t o f it s e x p o r t s t o

t h e d e v e l o p e d w o r l d . T h e u n a v a i l a b i l i ty o f s u f fi -

c i e n t d a t a o n e x c h a n g e r a t e f lu c t u a t i o n s vis-a-vis

t h e o t h e r m a j o r t r a d i n g p a r t n e r s ( e . g . , K u w a i t )

h a s l i m i t e d t h e s c o p e o f t h e s t u d y t o o n l y a

p o r t i o n o f P a k i s t a n ' s e x p o r t s .

I n t h e n e x t s e c t i o n , w e r e v i e w b r i e f l y t h e

m e t h o d o l o g y a n d t h e e x is t in g e v i d e n c e o n t h e

e f f e c t s o f e x c h a n g e r a t e v a r i a t i o n o n t r a d e f l o w s .

A n e s t i m a t i o n e x e r c i s e i s p r e s e n t e d a n d d i s -

c u s s e d i n S e c t i o n 3 . W e c o n c l u d e t h e s t u d y b y

o f f e r i n g a s u m m a r y o f o u r f i n d i n g s a n d d i s c u s s in g

t h e i r r e l a ti o n t o t h e c u r r e n f e v i d e n c e o n t h e

i s s u e .

2. M E T H O D O L O G Y A N D C U R R E N T

E V I D E N C E

H o o p e r a n d K o h l h a g e n ( 1 9 78 ) is t h e f ir s t s t u d y

:~'An ear l ie r version of t i le pap er was pr esen ted a t the

Q u e b e c m e e t i n g s o f t h e C a n a d i a n E c o n o m i c A s s o c i a -

t i on i n June 1989 . Whi l e t he pape r does repo r t j o in t

re sea rch , t he f i r s t au thor ahmc i s r e spons ib l e fo r t he

pre sen t ve r s ion and , t he re fo re , fo r t he e r ro r s that

rema in . C om puta t i ona l a ssi st ance o f Ca r los Le i tc and

t h e e x t r e m e l y h e l p f u l c o m m e n t s o f t w o a n o n y m o u s

re fe rees a re g ra t e fu l l y acknowledged .

1225


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1226 WORLD DEVELOPMENT

to analyze systematically the effects of exchange

rate un certa inty on trade flows, and the method-

ology proposed by them, in original or modified

f o r m s , is often used as the basis of empirical

investigations. Borrowing from the theory of the

firm under risk, Hooper and Kohlhagen model

the behavior of exporters and importers operat-

ing unde r exchange rate risk, and conc lude that if

traders are generally risk averse, an increase in

exchange rate risk will unambi guously reduce the

volume of trade. The effect on prices of traded

goods, however, is uncertain and depends cru-

cially upon how risk is shared among tile traders

(importers versus exporters). For empirical

studies, the amdysis implies a model of bilateral

trade flows wherein the volume and price of

g o o d s traded are simultaneously determined by

measures of both the extent and nature of

exchange risk, in addition to the usual income

(output) and price variables. The Hooper-

Kohlhagen framework has been extended by

Cushman (1986) to include what has been termed

the "'third-country effects." C ushma n argues that

the r ecognition of third countries in the analytical

framework implies that the effects of exchange

rate variability on bilateral trade flows depend

n o t only upon the exchange rate risk experienced

by tile country under consideration, but also

upon the correlations of exchange rate fluctua-

tion experienced by other count ries in the model.

Consequently, measures of these correlations or

cowtriances must be a part of any empirical

explanation. In summary, the existing methodol-

ogy comprises an estimating equation (or a

system of equations) which superimposes on the

"traditional" explamttion of bilateral trade flows

a set of explanatory variables that purport to

measure the extent and nature of risk arising

from exchange rate variability. If the focus is on

explaining the exports of a small c o u n t r y in

various markets, this method is equivalent to

estimat ing a relationship of the type: 5

X ; t ) = . ; , , +

~ , ~

Y ; t) + . , 2 [ P X . t ) / P D i

t ) ]

+ ~ i 3 E i t ) + t i4 R i t ) + u i t )

where X, (t) = volume of exports demande d

in country (market) i

Y i

(t) = real income (out put) in

country i

P X i I ) - price of exports (in supplier's

currency)

P D , (t) = dome stic price level in

country i

E i (t) = the nomina l exchange, rate

(units of supplier's currency

per unit of country Fs

currency)

R, (t) = a (a vector of) measure(s ) of

exchange risk

Notwithst anding the purely econometri c issucs

involved, the disagreement in tile literatt.rc.

particularly among the empirical studies, stems

primarily fron3 the nonuniform ity of what ix

included in R, (t) and how it is measured.

l looper and Kohlhagen (1978) examines bi-

lateral and multilateral trade among tile LJnited

States, the United Kingdom, (;crmany, J a p a n ,

France and Cana da for 1965 75. Measurh lg

exchange rate risk by tile standard error of

nominal exchange rate flnctuations, Itooper and

Kohlhagen discover, contrary to their theoretical

analysis, no substantial evidence of any signifi-

cant impact on the voh, me of trade. The?

observe nevertheless some impact on prices

consistent with their analysis. Cushman (1983),

however , argues that by analyzing cxchangc rate

risk in real rather than nominal terms, the

t tooper -Kohl hagen finding regarding tile impact

on volnme o f trade may be altered. Moreover+

tile impact on prices is much stronger in such a

framework. L:xtendmg tile t tooper- Kohlhage n

exercise to include more recent data (1965 77)

and a larger nunl ber of countries onl \ streng-

thens ('ushman's findings.

One obvious shortcoming of these two studies

is the extremely short span of the floating ex-

change rate period covered by their samples.

Moreovcr, combi ning the two exchange rate

regimes creates the possibility of a nonhomo-

gcnous sample. Both War ner and Kreinin (1983)

and Akh ta r and l iilton (1984) awfid these

problems,

t h e

former by clearly distinguishing

betwee n tile periods of fixed (1957:1 1970:IV)

and floating (1972:1-1980:IV) cxchangc ratcs,

and tile latte r by focusing on a period (1974 Sl)

pertaining entircly to flexible exchange ratcs.

Using quarterly data, Warner and Krcinin try to

assess the effects of variations it+ tile current and

expected exchange rates on real trade flows by

estimating import

a n d

export demand functions

for 19 deve loped and 18 deve loping countri es.

Warne r and K rcini n's only nlethodological

advance for nlodeling purposes is

t o

emphasize

the possible differential response by relative

prices and exchange rates, and the use of lags it+

tile latter. Even though thcrc is no definite

pattcrn m thc direction of the effect, Warne r and

Kreinin observe that generalized floating has had

an inw,act on the volume of trade in that the

cstinlated coefficients change significantly from

onc period to the other+" Akhtar and llilton.

howevcr, reach more definitive conclusions.

('o nce ntr ati ng only on the bilateral trade bc'-

twecn tile United Ntates and West (;crmanx, but


3/16

EXCHANGE RATE VOLATILITY 1227

extending the model to include additional ex-

planatory variables such as capacity utilization,

Akhtar and Hilton conclude that exchange rate

uncertainty, as measured by the standard devia-

tion of effective exchange rates, has had a

significant negative impact on the import s and

exports of the two countries. Gotur (1985),

however, questions the robustness of the Akh tar-

Hilton results. By expanding the number of

countries to include France, Japan and the

United Kingdom, and by varying somewhat the

sample period and the measures of exchange rate

risk, Gotur fails to find conclusive evidence that

exchange rate uncertainty has any significant

impact on bilateral trade flows, thereby reaffirm-

ing the similar conclusions of an earlier IMF

(1984) study on the issue.

Cushman (1986) argues that previous estima-

tion exercises may have underestimated the

effects of exchange rate uncertainty by focusing

only on models of bilateral trade which fail to

take into account the third-country effects. In

support of his contenti on, Cushman analyzes the

US bila teral export flows to its six largest trading

partners, with and without third-country effects.

Clearly distinguishing between two s ubp er iod s--

1965-77 and 1973-83 -- Cushman discovers

individually and jointly significant third-country

risk effects in most cases, suggesting that ex-

change rate risk has played a role in depressing

intern ational trade during the floating period. In

an equally careful, recent study on the extent and

effects of exchange rate uncerta inty on global

imports of 11 major industrial countries, Kenen

and Rodrik (1986) reach similar conclusions.

The evidence with regard to developing coun-

tries is even more inconclusive. Although

Warn er and Kreinin (1983) menti on including 18

developing countries in their sample, they fail to

report any results or conclusions. The only other

generally available contributions are Bahmani-

Oskooee (1984, 1986), Coes (1981) and Rana

(1983). Bahamani-Oskooee finds clear evidence

that changes in effective exchange rates have a

significant impact on trade flows of selected

developing countries even in periods when most

of them had pegged exchange rates. The focus of

both studies, however, is whether trade flows in

developing countries respond differently to

changes in exchange rates and relative prices.

Conseque ntly, the implications for the effects of

exchange rate uncer tainty are at best indir ect ]

Coes and Rana, however, analyze the issue in a

manner similar to ttooper-Kohlhagen. Using

annual data, Coes examines Brazilian exports (as

a proportion of the total value added) in nine

primary and 13 manu fac tur ing sectors for 1965-

74, concluding that the significant reduction in

exchange rate uncertainty in the Brazilian eco-

nomy during the crawling-peg period may have

contributed as much as the changes in relative

prices toward explaining the great er openness of

the economy after 1968. Rana (1983), which is

the most thorough study in the context of

developing countries, reaches essentially similar

conclusions regarding the import volumes of a

number of Southeast Asian countries, some of

which are also included in the Bahmani-Osk ooee

sample. Closely following the Hooper-

Kohlhagen methodology but exploiting a variety

of measures of exchange risk, includi ng some

nonparametric measures, Rana estimates the

import demand function for each country in the

sample, concluding that the increase in exchange

rate risk brought about by generalized foating

has a significant, negative impact on import

volumes.' Surprisingly, however, Rana (1983)

does not analyze export volumes in the same

man ner although they are likely to be of greater

interest."

In the next section, we add to this meagre

evidence by presenting the results of our estimate

of the dem and for Pakis tan's exports for 1974-85.

While we attempt no methodological advances,

we hope to avoid some of the common problems

of the earlier studies by examining only one

country, by studying a period that pertains

entirely to generalized floating, by deploying

data that require no inte rpolati on, and by consid-

ering as many measures of exchange rate risk as

the data allow us to compute, including some

third-country effects.

3. NUME RICA L RESULTS

All of the results presented in this section are

estimates of variants of the export demand

function specified in Section 2, using ordinary

least squares (OLS) estimation and quarterly

data for 1974-85. m We arrive at these varian ts

through embelli shments of the basic specifica-

tion. These variants may be classified in two

separate categories. Under the first category, we

broaden the scope of the specification as outlined

above by considering both linear and log-linear

forms, by allowing for lags in the explanatory

variables, particularly the relative price and

exchange rate, and by including the lagged

dependent variable to account for a possibly slow

adjustment to equilibrium. The second category

of improvements concerns the use of a wide

range of proxies for exchange rate risk, including

those reflecting third-country effects. We con-

sider in particular: (a) the within period standard

deviation of nominal exchange rates, (b) a


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1228 W O R L D D E V E L O P M E N ' I

m o v i n g a v e r a g e o f s t a n d a r d d e v i a t i o n s in ( a)

a b o v e , ( c ) t h e c o e f f i c i e n t o f v a r i a t i o n o f n o m i n a l

e x c h a n g e r a t e s , ( d ) m e a s u r e s s u c h a s ( a ) , ( b ) a n d

( c ) a b o v e i n te r m s o f r ea l e x c h a n g e r a t e s , ( e )

m e a s u r e s o f ( a ), ( b ) a n d ( c ) a b o v e a p p l i e d t o

c h a n g e s i n n o m i n a l o r r e a l e x c h a n g e r a t e s , ( f )

G i n i ' s m e a n d i f f e r e n c e i n n o m i n a l a n d r e a l

t e r m s , a n d ( g ) v a r i o u s m e a s u r e s r e l a t i n g to th i r d -

c o u n t r y e f f e c t s, fo r e x a m p l e , s t a n d a r d d e v i a t i o n s

a n d c o e f f i c ie n t s o f v a r ia t i o n o f e x c h a n g e r a te s f o r

t r a d in g p a r t n e r s n o t d i r ec t ly u n d e r c o n s i d e r a t i o n ,

a n d p a i r w i s e a n d j o i n t c o v a r i a n c e s o f b i l a t e r a l

e x c h a n g e r a t e f l u c t u a t i o n s e x p e r i e n c e d

vis-~ l-vis

t h e t r a d i n g p a r t n e r s .

T h e b e s t o u t c o m e s o f th e e s t i m a t i o n e x e r c i s e

a r e s u m m a r i z e d in t h e a p p e n d i x t a b le s . W h i l e th e

u s u a l c r i te r i a - - h i g h /~ 2 p r o p e r a l g e b r a i c s i g n s

a n d s t a t is t i c a l s ig n i f i c a n c e o f th e e s t i m a t e d c o e f f i -

c i e n t s , a s w e l l as th e a b s e n c e o f p r o b l e m e t i c

l e v e l s o f s e r i a l c o r r e l a t i o n a n d m u l t i c o l l i n e a r i t y

h a v e b e e n u s e d t o s e le c t t h e r e s u l ts p r e s e n t e d ,

t h e s c o p e o f t h e s e l e c ti o n h a s b e e n b r o a d e n e d t o

i n c l u d e o u r f i n d in g s w i t h r e g a r d t o s o m e e x p l a n a -

t o r y v a r i a b l es t ha t h a v e b e e n d e e m e d i m p o r t a n t

i n p r e v i o u s s t u d i e s . T h e s e v a r i a b l e s a r e t h e

l a g g e d d e p e n d e n t w t r i a b l e , t i m e l a g s i n r e l a t i v e

p r i c e s a n d e x c h a n g e r a t e s , a n d r i sk m e a s u r e s

b a s e d o n r e a l e x c h a n g e r a t e s . M o r e s p e c i f i c a l l y ,

t h e f ir st s e v e n a p p e n d i x t a b le s s u m m a r i z e t h e

e s t i m a t i o n o f t h e e x p o r t d e m a n d f u n c t i o n , i g n o r-

i n g t h i r d - c o u n t r y e f f e c ts . T h e l as t f o u r p e r t a i n

e n t i r e l y t o th e c o n s i d e r a t i o n o f t h e s e e f f e c t s .

C o n s i d e r i n g f ir st T a b l e s A 1 - A 7 , w e n o t e s o m e

g e n e r a l f e a t u r e s o f t h e e x e r c i s e . A l l a t t e m p t s t o

g e n e r a t e a r e a s o n a b l y s a t i s f a c t o r y e x p l a n a t i o n o f

e x p o r t s to t h e U n i t e d K i n g d o m h a v e b e e n

f r u i t l e s s . W h i l e t h e r e i s l i t tl e s e r i a l c o r r e l a t i o n ,

a n d h a r d l y a n y m u l t i c o I l i n e a r i l y in t h e s a m p l e ,

/~-~ n e v e r r i s e s a b o v e ( J.() 6. M o r e o v e r , n o n e o f t h e

o r d i n a r i ly i m p o r t a n t v a r i a b l es , e x c e p t l a g g e d

G N P , is s t a ti s t ic a l l y si g n i f ic a n t . F o r t h e r e m a i n -

i n g t h r e e c o u n t r i e s i n t h e s a m p l e , h o w e v e r , t h e

r e s u l ts a r e q u i t e s a t i s f a c t o r y m t e r m s o f th e

g o o d n e s s o f f it a n d t h e s i g ns a n d m a g n i t u d e s o f

t h e e s t i m a t e d c o e f f i c i e n t s , m o s t c o n f i r m i n g a

priori e x p e c t a t i o n s . N e x t , o f th e t w o f u n c t i o n a l

f o r m s , t h e l i n e a r is t h e b e l i e r s p e c i f i c a ti o n . N o t

o n l y d o e s i t g e n e r a t e l a r g e r /{ -~ s, b u t t h e e s t i -

m a t e d c o e f f i c ie n t s ar e n o t m a r r e d b y m u l t i co l l i-

n e a r i t y , w h i c h i s a m a j o r p r o b l e m i n t h e c a s e o f

t h e l o g - l i n e a r s p e c i f i c a t i o n .

A s r e g a r d s t h e i m p o r t a n t e x p l a n a t o r y w l r i ab l c s

o t h e r t h a n t h e e x c h a n g e r a t e r i s k m e a s u r e s ,

r e s u l t s m T a b l e s A 1 A 7 c o n f i r m t h e s i g n i f ic a n c e

o f i n c o m e , r e l a t i v e p r i c e , an d t h e e x c h a n g e r a t e ,

a n d w i t h a p p r o p r i a t e a l g e b r a i c s i g n s. " l O u r

f i n d i n g s w i t h r e g a r d t o s o m e o l h e r w l r i a b l e s ,

h o w e v e r , m a y b e a t v a ri a n c e w i t h t h o s e o f e a r l ie r

e x e r c i s e s . I n p a r t i c u l a r , u n l i k e K h a n ( 1 9 7 4 ) , w c

f i n d n o s u p p o r t f o r i n c l u d i n g th e l a g g e d d e p e n -

d e n t v a r i a b l e i n t h e l is t o f e x p l a n a t o r y w l r i a b l e s

f o r P a k i s t a n ' s e x p o r t s f o r t h e p e r i o d u n d e r

c o n s i d e r a t io n . I n T a b l e A 4 , X ( t 1 ) i s n o t o n l y

n e v e r s i g n if i c a n t , it d o e s n o t i m p r o v e / ~ 2 f o r e v e n

a s i n g l e c a s e . I t s i n c l u s i o n r e s u l t s i n o n l y a s l i g h t

i n c r e a s e i n o u r m e a s u r e o f m u l t i c o l l i n e a r i t y ,

t h e r e b y s i m p l y c o n f i r m i n g t h a t i t is s u p e r -

f l u o u s . ~2 G i v e n t h a t K h a n ( 1 9 7 4 ) r e l a t e s t o t h e

p e r i o d o f fi x e d e x c h a n g e r a t e s , a n e x p l a n a t i o n

f o r t h e d i f f e r e n t f i n d i n g i s n o t n e c e s s a r y . I t i s

p o s s i b l e , h o w e v e r , t h a t a s w i t c h t o f l e x i b l e

e x c h a n g e r a t e s a n d t h u s to g r e a t e r u n c e r t a i n t y

h a s e li c i t e d t h e r a t i o n a l r e s p o n s e o f a c c e l e r a t i n g

t h e a d j u s t m e n t t o e q u i l i b r i u m . I n a s i m i l a r v e t o ,

o u r c a l c u l a t i o n s f u r n i s h l i t tl e s u p p o r t f o r a l lo w i n g

f o r l a g s m e i t h e r t h e r e l a t i v e p r i c e o r t h c

c x c h a n g e r a t e w l r i a b l e . A s i s c l e a r l y s h o w n i n

T a b l e A S , w h i c h d i s p l a y s th e r e s u l t s o f a l l o w i n g

f o r s i m p l e l a g s u p t o t h r e e q u a r t e r s m b o t h t h e

r e l a t i v e p r i c e a n d t h e e x c h a n g e r a t e , t h e r e a r c

o n l y t w o i n s t a n c e s o f s ta t i s t i c a l s i g n i f i c a n c e -

P X I P D ( t 1 ) i n t h e c as e o f W e s t G e r m a n y a n d

E ( t - 3 ) f o r t h e U n i t e d S t a te s . t~ M o r e o v e r , t h e

r e l i a b i l i t y o f t h e s e e s t i m a t e s i s h i g h l y s u s p e c t i n

v i e w o f t h e l a r g e i n c r e a s e in m u l t i c o l l i n e a r i t y

w h i c h n u l l i f i e s t h e s t a t i s t i c a l s i g n i f i c a n c e o f

o t h e r w i s e i m p o r t a n t e x p l a n a t o r y w l r i a b l c s

Y ( t - 1) m th e ca s e o f W e s t G e r m a n y , a n d M A S D

a n d S D f o r th e U n i t e d S t a te s . A l t h o u g h t h e

l i t e r a t u r e l a c k s e v i d e n c e o n t h e i s s u e, B a h m a n i -

O s k o o c e ( 1 9 8 6 ) c o n t e n d s t h a t s u ch l ag s m a y b e

i m p o r t a n t in e x p l a i n i n g t h e e x p o r t s o f s o m e

d e v e l o p i n g c o u n tr i es . T h e B a h m a n i - O s k o o c c

s a m p l e o f s e v e n c o u n t r i e s , h o w e v e r , d o e s n o t

i n c l u d e P a k i s t a n a n d t h e l a g s f o r t h r e c o f th c

c o u n t r i e s a r c n o t s t a t i s t i c a l l y s i g n i f i c a n t a t t h e

c o m m o n l y d e p l o y e d l e v e ls . 14 I n v i e w o f t h e

d i s c u s s i o n a b o v e , t h e l i n e a r s p e c i f i c a t i o n s s u n >

m a r i z e d i n T a b l e A 1 a r e o u r p r e f e r r e d e s t i m a t e s .

T a b l e I p r e s e n t s t h e i n c o m e a n d p r i c e e l a s t ic i t ie s

b a s e d o n t h e s e e s t i m a t e s . I t i s e v i d e n t t h a t t h e s e

e l a s t i c it i e s a r e w e l l w i t h i n t h e r a n g e o b s e r v e d i n

o t h e r s t u d i e s . ~5

W e t u r n n o w t o th e s i g n i f i c a n c e o f th e e x -

c h a n g e r a t e r i sk v a r i a b l e s , t h e f o c u s o f t h is p a p c r .

T h e n u m b e r s in T a b l e s A 1 - A 7 s u g ge s t o n c e

a g a i n s o m e w h a t m i x e d r e s u l ts . F i r s t , t h e r e i s

l it t le e v i d e n c e t h a t e x c h a n g e r a t e ri s k , m e a s u r e d

i n r e a l t e r m s , h a s a n y i m p a c t a t a l l . T a b l e s A 6

a n d A 7 d i s p l ay t h e b e s t o u t c o m e s o f o u r c x e r c i s c

in t hi s r e g a r d . I t i s i m m e d i a t e l y o b v i o u s t h a t l h c

r e a l e x c h a n g e r a t e r is k w m a b l e is s i g n i f ic a n t i n

o n l y o n e c a s e M A S D i n g r o w t h t e r m s f o r t h c

U n i t e d S t a t es . I t is e q u a l l y s u r p r i s i n g , h o w e v e r ,

t h a t n o m i n a l e x c h a n g e r a t e w ~ l at il it y a p p e a r s

i m p o r t a n t . I f w e l im i t th e a n a l y s i s t o th e p r e -


5/16

E X C H A N G E R A T E V O L A T IL I TY

Table 1. I n c o m e a n d p r i c e e l a s t ic i ti e s

Incom e Re la t i ve p r i ce Excha nge ra t e

W est G er m an y (i)* 4.4850 - 1.4459 1.0{198

(ii )t 4.3105 - 1.33811 0.9509

J a p a n ( i) 1 . 8 5 1 5 - 1 .4 / 1 2 4 1 .3 68 7

(ii) 1. 87 13 - 1.36(/4 1.2501

Un i t ed S t a t e s ( i ) Y2609 -1 .8 818 1 .8000

(ii) 3.1785 - 1.8889 1.9381

*(i ) = Speci f ica t ion 1.

t ( i i ) = Spe ci f ica t ion 2.

1229

f e r r e d l i n e a r s p e c i f i c a ti o n , w e o b s e r v e t h a t t h e

c o e f f i c i e n t o f M A S D i s n e g a t i v e a n d s t a ti s t ic a l ly

s i g n if i ca n t f o r W e s t G e r m a n y a n d t h e U n i t e d

S t a t e s , r e g a r d l e s s o f w h e t h e r c u r r e n t o r o n e -

p e r i o d l a g g e d G N P is u s e d a s t h e i n c o m e

v a r i a b l e . E v e n f o r J a p a n , t h e c o e f f i c i e n t o f S D is

n e g a t i v e a n d r e a s o n a b l y l a r g e t o b e c o m e s i g n if i-

c a n t a t a s o m e w h a t h i g h e r l e v e l . F i n d i n g s s u c h a s

t h e s e a r e n o t , h o w e v e r , c o n s i s t e n t w i t h t h e m o r e

r e c e n t e v i d e n c e c i t e d i n t h e p r e c e d i n g s e c t i o n . I n

t h e t h e o r e t i c a l f r a m e w o r k u n d e r l y i n g s u c h a n

e x e r c i s e , a s f ir s t a r t i c u l a t e d b y H o o p e r a n d

K o h l h a g e n ( 1 9 7 8 ), t h e r e i s n o a p r i o r i b a s i s f o r

f a v o r i n g a r e a l m e a s u r e o f e x c h a n g e r is k o v e r a

n o m i n a l o n e . T h e c h o i c es d e p e n d u p o n w h e t h e r

t h e e c o n o m i c c a l c u l a ti o n s a r e a s s u m e d t o be

c a r r i e d o u t i n r e a l o r n o m i n a l t e r m s . G i v e n t h e

n a t u r e o f o u r s p e c i f i c a t i o n , i t m a y a l s o d e p e n d

u p o n t h e e x t e n t o f t h e p a s s - t h ro u g h o f e x c h a n g e

r a t e w ~ r i a t i o n s i n t o p r i c e s . I f w e m a y a s s u m e t h a t

P a k i s t a n i e x p o r t e r s a r e i n t e r e s t e d i n a f i x e d p r i c e

i n f o r e i g n c u r r e n c y , a n d t h is is n o t a n u n r e a s o n -

a b l e a s s u m p t i o n g i v e n t h e n a t u r e a n d p u r p o s e o f

m o s t T h i r d W o r l d e x p o r t s , a n y i n c r e a s e in t h e

n o m i n a l e x c h a n g e r a t e w i ll i m m e d i a t e l y p a s s

t h r o u g h e n t i r e l y t o P X . W i t h I D f i x e d , t h e r e a l

e x c h a n g e r a t e n e e d n o t c h a n g e a t a l l . C o n s e -

q u e n t l y , t h e o b s e r v e d v a r i a b i l it y in th e r e a l

e x c h a n g e r a t e w o u l d b e l o w e r t h a n t h a t in t h e

n o m i n a l r a t e , r e n d e r i n g i t l e ss li k e l y t o b e

s t a t i s t i c a l ly s i g n i f i c a n t . T h e r e l a t i v e l y c l o s e m a g -

n i t u d e s o f t h e e l a s t ic i t ie s o f P X / P D a n d E a s

r e p o r t e d i n T a b l e 1 f u r n i sh s o m e s u p p o r t f o r s u c h

a n e x p l an a t i o n . I n s u m m a r y , h o w e v e r , t h e o b s e r -

w t t i o n s a b o v e s u g g e s t t h a t t h e h y p o t h e s i s t h a t

e x c h a n g e r a t e v o l a ti l it y m a y h a v e a d v e r s e l y

a f f e c t e d P a k i s t a n ' s e x p o r t s d u r i n g t h e p e r i o d

u n d e r c o n s i d e r a t i o n m a y n o t b e r e j e c te d b y th e

data. 1~,

A l t h o u g h t h e ca l c u la t io n s s u m m a r i z e d in

T a b l e s A 8 - A 11 w o u l d s u g g e s t t h a t t h e i n cl u s i o n

o f th e t h i rd c o u n t r y e f f ec t s im p r o v e s o u r e x p h m a -

t i o n o f P a k i s t a n ' s e x p o r t s , c a u t i o n m u s t b e

e x e r c i s e d in i n t e r p r e t in g t h e e v i d e n c e p r e s e n t e d .

F i r s t , i n li g h t o f t h e c a l c u l a t i o n s d i s c u s s e d s o f a r ,

w e u t i l i z e o n l y t h e l i n e a r s p e c i f i c a t i o n . S e c o n d ,

f o r w a n t o f a b e t t e r a l t e r n a t i v e , w e u s e t h e

s t e p w i s e r e g r e s s i o n t e c h n i q u e t o c h o o s e t h e

i m p o r t a n t r is k v a r i a b l e s f r o m a li st t h a t i n c l u d e s

p a i r w i s e a n d j o i n t c o v a r i a n c e s o f P a k i s t a n ' s

b i l a t e r a l e x c h a n g e r a t e s i n a d d i t i o n t o t h e s t a n -

d a r d d e v i a t i o n a n d s i m i l a r m e a s u r e s . T h i s t e ch -

n i q u e p e r m i t s u s t o t a k e i n t o c o n s i d e r a t i o n t h e

e x c h a n g e r a t e v o l a ti l it y e x p e r i e n c e d b y P a k i s t a n

v i s - / t - v i s e a c h o f it s t r a d i n g p a r t n e r s , a n d t h e

p o s s i b l e i n t e r c o r r e l a t i o n s a m o n g t h e b i l a t e r a l

e x c h a n g e r a t e f l u c t u a t i o n s . C a r e a n d a t t e n t i o n

m u s t b e e x e r c i s e d i n i n t e r p r e t i n g b o t h t h e s ig n s

a n d m a g n i t u d e s o f th e e s t i m a t e d c o e f f ic i e n ts , f o r

t h e s e d e p e n d o n ( a ) w h e t h e r t h e e x c h a n g e r a t e

v a r i a t i o n s e x p e r i e n c e d b y t h e t h ir d c o u n t r y ( t h e

t r a d i n g p a r t n e r n o t d i r e c t ly u n d e r c o n s i d e r a t i o n )

a r e s i m i l a r, ( b ) h o w r i s k i s s h a r e d b e t w e e n t h e

i m p o r t e r a n d e x p o r t e r , a n d ( c ) t h e e x t e n t t o

w h i c h t h i r d c o u n t r i e s a r e d i s t i n c t a l t e r n a t e m a r -

k e t s. N o c le a r p a t t e r n e m e r g e s w h i c h in d i c a t e s

t h e i m p a c t o f t h e s e f a c t o r s .

W h a t m a y b e m o r e i m p o r t a n t i n t h e c o n t e x t o f

t h is p a p e r , h o w e v e r , is w h e t h e r a n y o f t h e s e

e f f e c t s a r e s t a t i s t i c a l l y s i g n i f i c a n t . L o o k i n g f i r s t

a t th e r e s u l t s c o l l e c t i v e l y , w e n o t e t h a t t h e

i n c lu s i o n o f th e t h i r d - c o u n t r y e f f e c t s a s d e s c r i b e d

a b o v e s u b s t a n t i a l l y i m p r o v e s t h e s p e c i f i c a t i o n o f

t h e e x p o r t d e m a n d f u n c t io n . J u d g i n g f r o m t h e

l as t t w o c o l u m n s o f t h e t a b l e s , w h i c h d i s p l a y t h e

b e s t o u t c o m e s f o r e a c h c a s e , o n e d i s c o v e r s a

h i g h e r /~ 2 f o r e a c h c o u n t r y , a d d i t i o n a l s t a t i s ti -

c a l l y s i g n i f i c a n t c o e f f i c i e n t s , a n d D W s t a t i s t i c s

a n d C O N D X i n d ic e s t h a t a r e u n a f f e c te d . T h e

r e l a t i v e s t a b i l i t y ( i n c o m p a r i s o n w i t h t h e r e s u l t s

i n T a b l e A I ) o f th e e s t i m a t e d c o e f f i ci e n t s a ls o

s u g g e s t s th a t t h e g a i n i n e x p l a n a t o r y p o w e r i s n o t

e n t i r e l y s p u r i o u s .

F o r i m p l i c a t i o n s w i t h r e g a r d t o t h e i m p a c t o n

e x p o r t l e v e l s , w e c o n s i d e r e a c h c o u n t r y i n d i-

v i d u a l l y . O n c e a g a i n , i t i s e a s y t o d i s p o s e o f t h e


6/16

1230 W O R L D D E V E L O P M E N T

U n i t e d K i n g d o m c a se . W h i l e th e i n c l us i o n o f t h e

t h i r d - c o u n t r y e f f e c t s i m p r o v e s t h e f i t, a n t~ -~ o f

0 . 1 9 2 i s s t il l v e r y l o w . B u t i t m a y b e w o r t h

r e m a r k i n g t h a t t h e g a i n is e n t i r e l y d u e t o

M A S D G , c l ea r ly a t h i rd - c o u n t r y r is k v a ri a b lc .

F r o m T a b l e s A S - A l l , i t is a ls o q u i t e e v i d e n t

t h a t t h e b e s t r e s u l t s a r e a g a i n o b t a i n e d m t i le c a s e

o f t h e U n i t e d S t a t e s . C o n s i d e r i n g t h e b e s t s p e c i -

f i c a t i o n s , w e n o t i c e t h a t t h e a l r e a d y h i g h I e i s

f u r t h e r i n c r e a s e d . T h e p r o b l e m s o f s e r ia l c o r r e h t -

t io n a n d m u l t i c o l l i n e a r i t y its i n d i c a t e d r e s p e c t i v e -

ly b y t h e D W s t at is t i c a n d C O N D X a r e a l m o s t

n o n e x i s t e n t . T h e r e m a r k a b l e s t a b il i (y o f t h e p r ic e

a n d i n c o m e c o e f f i c i e n t s i n t h e f a c e o f t h c

p e r m u t a t i o n s o f t h i r d - c o u n t r y r i s k v a r i a b l e s

p o i n t s t o t h e r o b u s t n e s s o f b o t h t h e s p e c i f ic a t i o n

a n d e s t i m a t i o n . I n i n t e r p r e t i n g t h c c o e f f ic i e n t s ,

w e f i n d t h a t i n c r e a s e d c o v a r i a n c e o f c h a n g e s in

t h e v a l u e s o f t h e U S d o l l a r v i s a v i s t h e d e u t s c h e

m a r k a n d t h e J a p a n e s e y e n h a v e t e n d e d t o

d e p r e s s P a k i s t a n ' s e x p o r t s t o t h e U n i t e d S t a t e s .

G i v e n t h a t m o v e m e n t s m t h e v a l u e o f t h e d o lh t r

a r e l i k e ly to b e n e g a t i v e l y c o r r e l a t e d w i t h t h o s e

o f t h e m a r k a n d t h e y c n , t h e r e s u l t is c o n s i s t e n t

w i th th e h y p o t h e s i s th a t b o t h W e s t G e r m a n y a n d

J a p a n s e r v e as a l t e r n a t e m a r k e t s f o r P a k i s t a n .

T h e h y p o t h e s i s r e c e i v e s f u r t h e r s u p p o r t f r o m t h e

f a c t t h a t t h e v a r i a b l e s u n d e r c o n s i d e r a t i o n

( C G R U S a n d C J P U S ) h a v e e x a ct ly th e o p po s i te

e f f ec t s o n e x p o r t s t o J a p a n a n d W e s t G e r m a n y . 7

T h e i n c l u s i o n o f t h e s e v a r i a b l e s a l s o s t r e n g t h e n s

t h e si z e a n d s t a t is t ic a l s ig n i f i c a n c e o f M A S D U S .

S i m i l a r o b s e r v a t i o n s a l s o a p p l y to t h e c a se o f

J a p a n . F h e r e l a ti v e g a in m R - is e v e n l a r g e r t h a n

t h at o b s e r v e d f o r t h e U n i t e d S t a t es . M o r e o v e r , a

n u m b e r o f th i r d - c o u n t r y e f f e c t s ar c i m p o r t a n t .

L o o k i n g a t t h e s p e c i f i c a t i o n s w i t h t h e l a r g e s t /~ 2 s ,

w e f i n d th a t w h i l e th e i m p a c t o f S D J a s n o t e d in

T a b l e A 1 is n o t s i g n i f i c a n t l y c h a n g e d , a s m a n y a s

f i v e p r o x i e s f o r t h i r d - c o u n t r y e f f e c t s h a v e s t a t i s ti -

c a l ly s i g n if i c a n t c o e f f ic i e n t s . W e h a v e a l r e a d y

a t t e m p t e d a n e x p h n r a t i o n o f th e p o s i t i v e c o e f f i -

c i en t o f C J P U S . T h i s e x p h t n a t io n is f u r t h e r

s u p p l e m e n t e d b y t h e p o s i t iv e s ig n o f t h e c o e f f i-

c ie n t o f C V A U S . T h e p o s it iv c s ig n s f o r C J P U K

a n d S D U K a l so c a rr y a s im i l a r in t e r p r e t a t io n .

T h e s ig n o f C V A G is n e g a t iv e . P a r a ll e l m o v e -

m e n t o f t h e t w o c u r r e n c i e s , w h i c h is n o t a n

u n l i k e l y o c c u r r e n c e i n t h e p e r i o d u n d e r c o n s i d e r -

a t i o n , m a y b e t h e e x p l a n a t i o n .

T h e c a s e o f W e s t G e r m a n y is s l ig h t ly d i f f e r e n t .

W h i l e t h e r e i s c o n s i d e r a b l e r e l a t i v e g a i n in /~ 2 ,

i n c l u s io n o f t h i r d - c o u n t r y e f f e c t s t e n d s t o d i m i n -

i sh t h e s i g n i f i c a n c e o f t h e b i l a t e r a l r i s k w l r i a b l e ,

M A S D G . T i le o t h e r c o e ff ic ie n ts , h o w e v e r , c o n -

t i n u e to b e s t a b l e . T h e i m p o r t a n t t h i r d - c o u n t r y

r is k v lt r ia b l e s a r e M S D U K , a n i n c r e a s e in w h i c h

t e n d s t o d e p r e s s e x p o r t s t o W e s t G e r m a n y , a n d

J C O V w h i c h h a s a s u b s t a n t i a l p o s i t i v e e f f e c t . A n

i n c re a s e in J C O V i m p l ie s g r e a t e r c o n c o r d a n c e m

t h e m o v e m e n t o f th e w f l u e o f t h e m a r k w i t h t il e

c u r r e n c i e s o f t h e o t h e r t r a d i n g p a r t n e r s o f

P a k i s t a n c o n s i d e r e d a s a g r o u p . G i v e n t h a t t h e

P a k i s t a n i r u p e e i s l i k el y t o h a v e d e p r e c i a t e d

c o n s i d e r a b l y a g a i n s t m o s t m a j o r c u r r e n c i e s d u r -

i n g t h e p e r i o d u n d e r c o n s i d e r a t i o n , t h e p o s i ti v e

s i gn o f t h e c o e f f i c i e n t o f J C O V is u n d e r s t a n d -

a b l e .

4 . S U M M A R Y A N D C O N C L U S I O N S

I ll t h is p a p e r , w e h a v e a t t e m p t e d a n e m p i r i c a l

c x a m m a t i o n o f t h e i m p a c t o f e x c h a n g e r a te

u n c e r t a i n t y o n P a k i s t a n ' s e x p o r t s t o it s m a j o r

t r a d i n g p a r t n e r s i n t h e d e v e l o p e d w o r l d fo r 1 9 7 4 -

8 5 . U s i n g m o n t h ly , a n d q u a r t e r l y d a t a , w e h a v e

i d e n t i f i e d a n d e s t i m a t e d f o r e a c h o f t h e t r a d i n g

p a r t n e r s a n e x p o r t d e m a n d f u n c t io n w h i c h t a k es

i n to a c c o u n t a v a r i e ty o f m e a s u r e s o f e x c h a n g e

r a t e u n c e r t a i n t y e x p e r i e n c e d b y P a k i s t a n d u r i n g

t h e p e r i o d . T h e m a j o r f i n d i n g s o f t h e e x e r c i s e a re

s u m m a r i z e d a s f o l lo w s :

( a ) A s r e g a r d s t h e g e n e r a l s p e c i f i c a t io n o f t h e

w t r i ou s e x p o r t d e m a n d f u n c t io n s , l i n e a r r a th e r

t h a n t h e l o g - l in e a r fo r m s e e m s t o p e r f o r m b e t t e r

f o r t h e p e r i o d u n d e r c o n s i d e r a t i o n . U n l i k e t h e

r e ce n t o b s e r v a ti o n s o f B a h m a n i - O s k o o e e o n t he

d e t e r m i n a n t s o f tr a d e f l o w s o f d e v e l o p i n g c o u n -

t r i e s , l a g s m r e l a t i v e p r i c e s a n d / o r e x c h a n g e r a t c s

d o n o t a p p e a r t o b e i m p o r t a n t .

( b ) E x c e p t f o r t h e c as e o f t h c U n i t e d K i n g -

d o r a , w h i c h p r e s e n t s s e v e r e c o m p u t a t i o n a l d i f fi -

c u l t ie s , t h e r e i s r e a s o n a b l y s t r o n g e v i d e n c e t o

s u g g e s t th a t t h e v o l u m e o f P a k i s t a n ' s e x p o r t s t o

t h e d e v e l o p e d w o r l d m a y h a v e b e e n a d v e r s e l y

a f f e c t e d b y i n c r e a s e d v a r i a b i l i t y o f i t s b i l a t e r a l

e x c h a n g e r a t e s .

( c ) I t i s t h e v a r i a b i l i t y m n o m i n a l r a t h e r t h a n

r e a l e x c h a n g e r a t e s t h a t i s s t a t i s t ic a l l y s i g n i f i c a n t .

T h i s f i n d i n g i s a t v a r i a n c e w i t h m u c h o f t h e

r e c e n t e v i d e n c e o n d e v e l o p e d c o u n t r i e s .

( d ) T h e i n c l u s io n o f t h i r d - c o u n t r y e x c h a n g e

r a t e r i s k m e a s u r e s s u b s t a n t i a l l y i m p r o v e s t h e

e x p l a n a t i o n o f e x p o r t s . W h i l e t h e d i r e c t i o n o f t h e

e f l e c t s o f e x c h a n g e r a t e v o l a t i l it y a s m e a s u r e d b y

t h e v a r i a b i l it y o f b i l a t e r a l e x c h a n g e r a t e s b e -

c o m e s s o m e w h a t l es s c e r t a i n , t h e c a l c u l a t i o n s

s t r o n g l y s u g g e s t t h a t t h e t h i r d - c o u n t r y r i s k

f a c to r s a r e i m p o r t a n t d e t e r m i n a n t s o f t h e e x p o r t

l e v e l s u n d e r c o n s i d e r a t i o n . E x c l u s i o n o f t h e s e

f a c t o r s , t h e r e f o r e , w i l l g i v e r i s e t o b i a s e d e s t i -

m a t e s i t s n o t e d e a r l i e r b y C u s h m a n .

( e ) F i n a l l y , t h e in t e r p r e t a t i o n o f t h e e s t i m a t e d

t h i r d - c o u n t r y e f f e c t s s u g g e s t s th a t J a p a n a n d


7/16

E X C H A N G E R A T E V O L A T I L I T Y 1231

W e s t G e r m a n y a c t a s t h e a l t e r n a t e m a r k e t s f o r U n i t e d K i n g d o m . T h i s f i n d i n g m a y b e i m p o r t a n t

P a k i s t a n ' s e x p o r t s to t h e U n i t e d S t a t e s a n d th e f o r f u t u r e a g g r e g a t i v e s t u d i e s .

N O T E S

1 . T h e e v i d e n c e f o r t h i s a s s e r t i o n i s o v e r w h e l m i n g .

S e e , fo r e x a m p l e , B r o d s k y , H e l l c i n e r a n d S a m p s o n

( 1 9 8 1 ) a n d R a n a ( 1 9 8 3 ) .

2 . D e G r a u w e ( 1 9 8 8 ).

3 . S e e , e . g . . R a n a (1 9 8 3 ) a n d W e s t e r f i e l d ( 1 9 7 7 ).

a n d s o u r c e s o f d a ta . T h c a u t h o r s t ir e a w a r e o f t h e

r e c e n t c r i t i c i s m o f t h e s i m p l e , s i n g l e e q u a t i o n e s t i n r a -

t io n b y T h u r s b y a n d T h u r s b y ( 1 98 4 ). W h i l e d a t a

d i f i cu l t i es h a v e k e p t u s f r o m u t i l i z in g t h e 2 S L S p r o c e -

d u r e , t h e r c l n a r k a b l e s t a b i l it y o f t h e c o e f f i c i e n t s in

s e v e r a l v e r s i o n s s u g g c s t s

t h a t

t h e s i m u l t a n e i t y b i a s m a y

n o t be s e r i o u s .

4 . T h i s i s a m a n i f e s t a t i o n o f t h e l e s s e r a b i l it y o f t h e

d e v e l o p i n g c o u n t r i e s t o h e d g e a g a i n s t t h e r i s k o f

e x c h a n g e r a t e v a r i a t i o n , o w i n g t o e x c h a n g e c o n t r o l s ,

u n d e r d e v e l o p e d o r n o n - e x i s t e n t f o r w a r d m a r k e t s i n

c u r r e n c i e s a n d o t h e r m e c h a n i s m s lk ~r d e a l i n g w i t h r i s k

i n i n t e r n a t i o n a l t r a n s a c t i o n s . F o r d e t a i l s o f th e e f f e c t s

a n d t h e a b i l i t y o f d e v e l o p i n g c o u n t r i e s t o d e a l w i t h

t h e m , s e e R a n a ( 1 9 8 3 ) .

1 1. W h i l e b o t h c u r r e n t a ri d h l g g e d i n c o m e p e r f o r m

w e l l , o u r c a l c u l a t i o n s t e n d t o s u g g e s t th a t l a g g e d

i n c o m e m a y h e t h e b e t t e r e x p l a n a t o r y v a r ia b l e .

1 2. O u r n r e a s u r e o f m u l t i c o l l i n c a r i t y , ( ' O N D X , i s t h e

c o m m o n l y e m p l o y e d r a t i o i n p e r c e n t a g e t e r m s o f t h e

l a r g e s t to t h e s m a l l e s t c h a r a c t e r i s t i c r o o t o f t h e m a t r i x

o f o b s e r v a t i o n s o n t h e e x p l a n a t o r y v a r i a b le s .

5 . T h e e x p l a n a t i o n d e p l o y e d h e r e i s t h e f a m i l i a r

o n e . S e e , l k )r e x a m p l e , K h a n ( 1 97 4 ) , W a r n e r a n d

K r e i n i n ( 1 9 8 3 ) , a n d B a h m a n i - O s k o o e e ( 1 9 8 6 ) . C l e a r l y

t h e a s s u m e d l i n e a r it y o f t h e e s t i m a t i n g r e l a t i o n s h i p i s

f o r e x p o s i t i o n a l p u r p o s e s o n l y . N o d o u b t t h e s p e c i f i c a -

t i o n m a y b e e m b e l l i s h e d b y c o n s i d e r i n g l a g s in p r ic e s ,

e x c h a n g e r a te a n d t h e d e p e n d e n t v a r i a b l e , a n d b y

i n t r o d u c i n g a d d i t i o n a l e x p l a n t l t o r y w i r i a b l e s s u c h a s

c a p a c i t y u t i l i z a t i o n .

6 . T h e s e o b s e r v a t i o n s a p p l y s t r ic t l y t o t h e s a m p l e o f

d e v e l o p e d c o u n t r i c s , f o r t h e r e i s n o r e p o r t i n g o f t h e

r e s u l ts f or th e d e v e l o p i n g e c o n o m i c s . T h e m e t h o d o l o g y

d e p l o y e d b y K r e i n i n a n d W a r n e r , h o w e v e r , i s d i f f er e n t

f r o m m o s t o t h e r s t u d i e s . K r e i n i n a n d W a r n e r r e l y o n

c o m p a r i n g e s t i m a t e d e x p o r t d e m a n d f u n c t i o n s f o r t h e

t w o e x c h a n g e r a t e r e g i m e s r a t h e r t h a n u t i l i z in g a

m e a s u r e o f e x c h a n g e r a t e v a r i a b i l i t y o r u n c e r t a i n t y .

7 . T o t h e e x t e n t p e r i o d t o p e r i o d c h a n g e s in e x -

c h a n g e r a t e s a r e m e a s u r e s o f v a r ia b i l i ty o f t h e r a t e s ,

B a h m a n i - O s k o o e e ' s s t u d i e s a r e r e le w m t . L i k e W a r n e r

a n d K r e i n i n ( 1 9 83 ) , h o w e v e r , t h e B a h m a n i - O s k o o c c

f o r m u l a t i o n d o e s n o t i n c l u d e a n y o t h e r m e a s u r e s o f

e x c h a n g e r a t e v o l a t i l i t y .

~. R;`nl;` l uses the nle as ure kn o w n as G in i 's 111o;.111

d i f f e r e n c e . F o r t h e r e l e v a n c e o f t h i s m e a s u r e in t h e

c o n t e x t o f e x c h a n g e r a t e r i sk , s e e W e s t e r f i e l d ( 1 9 7 7 ) .

1 3. T h e r e s u l t s r e p o r t e d

i n T a b l e

A 5 r e h l t e t o o n l y

s i m p l e l a g s . W e e x p e r i m e n t e d w i t h p o l y n o m i a l d i s t r i -

b u t e d l ag s o f s im i l a r l e n g t h s w it h o u t m u c h i m p r o v e -

i n e n [ .

1 4. M o r e o v e r , m a n y o f t h e s i g n i f i c a n t l a g s n o t e d b y

B a h m a n i - O s k o o e e a r e i n t h e f o u r t h q u a r t e r o r l a t e r .

T h e p r o b l e m o f m u l ti c o l li n e a r it y p r e v e n t e d u s f r o m

e x p e r i m e n t i n g w i t h l o n g e r l a gs , T h e f i n d in g s o f W a r n c r

a n d

K r e i n i n ( 1 9 8 3 )

o n

t h e i s s t i e , b a s e d

o n a

s p e c i f i c a -

t i o n n o t s u b s t a n t i a l l y d i f fe r e n t f r o n t o u r s , m a y n o t b e

c o n s i d e r e d o v e r w h e l m i n g e v i d e n c e f o r t h e i m p o r t a n c e

o f t h e s e l a g s e v e n f o r t h e d e v e l o p e d c o u n t r i e s . S e e

W a r n e r a n d K r e i n i n ( 1 9 8 3 ) , T a b l e 2 , p . 1 0 0 .

1 5. S e e , f o r e x a m p l e , T a b l e 1

in

M a r q u e z

a n d

M e N o i l Iy (1 9 8 8 ) , O u r T a b l e l d o e s n o t , h o w e v e r ,

s p e c i f y e l a s t ic i t i es w i t h r e g a r d t o t h e r e a l e x c h a n g e

r a t e . T h e s e m a y b e e a s i ly c a l c u l a t e d , b y u s i n g t h e

t r a n s l ' o r m a t i o n :

0 - o ~ / ~ - o )

w h e r e 0 i s t h e r e a l e x c h a n g e r a t e e l a s t ic i t y a n d o a n d

~" a r e r e s p e c t i v e l y t h e r e l a t i v e p r i c e a n d n o m i n a l

e x c h a n g e r a t e e l a st i c i ti e s r e p o r t e d i n T a b l e I . F o r

p u r p o s e s o f c o m p a r i s o n , t h e s e a r e : - ( I . 5 9 4 5 a n d

- 0 . 5 5 5 9 f o r W e s t G e r m a n y ; - 0 . 9 2 0 1) a n d - ( L 9 5 6 6 f o r

t h e U n i t e d S t a t e s a n d - ( I . 6 9 2 7 a n d - 0 . 6 5 1 5 lk ~r J a p a n

i n t h e o r d e r o f th e s p e c i f i c a t i o n s r e p o r t e d i n T a b l e A 1.

9 . U s i n g a s o m e w h a t d i f f er e n t m e t h o d o l o g y d u e t o

R i d d l e a n d Y a n d l e ( 1 9 7 2) , R a n a e x a m i n e s t h e i m p a c t

o f e x c h a n g e r a te u n c e r t a i n t y o n p r i m a r y c o m m o d i t y

e x p o r t s o f t h e s e c o u n t r i e s , a r r i v i n g a t s i m i la r c o n c l u -

s i o n s. F o r d e t a i ls a n d t h e d e f e n s e o f t h e m e t h o d o l o g y .

s e e R a n a ( 1 9 8 3 ) , p p . 1 1 0 - 1 7 5 .

I lL T h e a p p e n d i x c o n t a i n s th e d e t a i l s o f t h e n a t u r e

1 6. W e m u s t m e n t i o n t h a t o u r e x p e r i m e n t a t i o n w i t h

t h e n o n p a r a n l e t r i c m e a s u r e , G i n i ' s m e a n d i f f e r e n c e ,

f o l l o w i n g R a n a ( 1 9 8 3 ) d i d n o t y i e l d s i g n i f i c a n t r e s u l t s

w o r t h r e p o r t i n g .

1 7. S e e , f o r e x a m p l e , t h e s i g n a n d s ig n i f i c a n c e o f t h e

c o r r e s p o n d i n g c o e f f ic i e n t s i n t h e la s t t w o c o l u m n s o f

T a b l e A 6 a n d t h e f ir s t tw o c o l u m n s o f T a h l e A 4 .


8/16

1 2 3 2 W O R L D D E V E L O P M E N T

I~,EFEREN('ES

Akhtar, M. A., and I4. Sl'lcncc ttillon, "'Lflccls ol

exchange rate uncertainty on (i crm an and I_ .S.

lrad,'"

I+'edera[ Re ser i ' e tTa#tk o [

Non' York, ~ ) u a t t e r -

/ v R ( ' l ' / e l r , V o l . 9 , N o . I ( l t , l ~ 4 ) , p p . 7 - 1 5 , .

B a h m a n i - O s k o o c c , M . , + 'l+ hc d e t e r m i n a n t s o f t r a d e

flows: The case of dcvcloping countries,- J o u r n a l

o [

D e v e l o p m e n t E c o n o n l i c s , Vol. 20 (1986), pp. 1 0 7 - 1 2 3 .

I ~ a h m a n i - ( ) s k o o c , M . , ' () n the

c l l c c l s

oI cflcclivc

exchange ralcs till t r a d e IIo,,vs,'"

I t a l i a . J o t t # # l a [ q /

E c o , o m i c . s , Vol . LXV, No. 25,(+ (19,";4), pp. 5,7 67.

Brodsky, David, (L t lcllcincr, and G. S ampso n, -The

Impact o f ( ' u l + r l l l [:~xchangc Rate S \ s l C I l l t ) l l

l)vcloping Countries,'" T r a d e a n d I ) c v C l O l .m ' # l l . ,,Dr

U N ( I ; 4 1 ) ] ? .u l i c l t , N o . 3 ( I t J S I t , p p . 3 [ 5 ,-,+ .

( ' o c t, . 1 ) . . " ' T h e l a w l i n g p e g a n d e x c h a n g e r a t e

u n c c r l a i n t y ' " i l l . I . V v ' i l l i a i n s o n ( [ d . ) . t : ' l ch a l l g e Ra l ~ '

I ? u h ' w 77l(' 77wor v , I ' u r [ b r m a n c e a m t l ' r o V w c l s [ 7 ,

t h e ( ' r a u ' l i n ~ P e g .

(New York: St. Martin's Prcs~,.

1 9 ~ 1 ) , pp. 1 1 3 - 1 3 b .

( ' u s h m a l i . D a v i d ( L , " ' l| a s c x c h a ll g c r i s k d e p r e s s e d

i n i c r n a t i o n a l I r ad c '? T h e iin l'~ a ct o I l h i r d - c o u n t r , .

c x c h a l l g C r i s k , " J ( H I I I I ( I ] O [ I I I l ( ' ll l a l h ) l l a [ / l l o l lc Y a l l d

f ' 7 , a n c e ,

V o l . 5 , N o . 3 ( I t )N 6 ) , p p . 3 ~ 1 - 3 7 ~ .

( ' u s h m a l l . l ) : ix i tl ( ; . , " T h e e l l c o t s o l I c ; i l c x c l la l l g C r a l c

r i sk ( i l l i n lC l l l a l iO l l a l l r ; i dc , ' " J+~l l r lla] O [ hlle##1al io#ta]

[ ;col lo#HTc~.

Vt) l . 15' (198 3) . pp. 45,- f~3 .

D c ( h - a u w c . P a u l , " ' E x c h a n g e I - a le \ a i - i a b i l i l ~ a n d I h

s l o w d o w n i n gl- O 'a .. lh o 1 h l l c i n a l i o n a l t r a d e . ' " I M [ .

, ~ l a / f P f l / ~ l : s .

V o l . 3 5 . N o . 1 ( 1~ ) 8, i ). p p . 6 3 S4.

( h f l t l s t c i n .

M . ,

a n d M o s h i n S. K h a n . ' l i l c O l l l C a l l d

p r i c e c f l c c l s i n I o l i g i l I i a d c . ' " i n R . W . J o n e s a l l d

P. B. Kcnl._'n (Ik ls .). l h t m l / ~ o o k

n m ~ a r i d

S l a t A t i ~

V o l . 6 > ( I t J X 3 ) . p p . ~ J l '~ - ] l l4 .

W c x t c r l i c ld . J .. - A n c M u n i n a l i o n o [ I o l c i T n c x c h a n T c

t i s k U l l dC r l i x c t l and I l oa ih l ~ exc han ge l a lC 1Tinl c< ,. ""

JOlll lltl] O / [IIICI'#HII/OIItI/ Iqcom>.m'~. Vol. 7 (1U77t.

pp . 1, 41

2 1 1 0 .

A I > I q N I ) I X : I ) A I A S ( ) L R ( ' I S A N D V , ' \ R I , \ I > > I . I : I ) I F I N I I I ( ) N N

.V 'voltl lllC ot export ',: cC, ml',utcd I+'..'. cli;i,.lhi~ the

, : a L u m t { g u t - c s I ~ I V

u n i t v H l t l C

h ~ d c ' , : , , + I

a k b , , t a n , e x p o r t s ;

. ,, .t ar o+ ': .V, a t i + a i 1 k o l P a k i S t a l l ( , . a r h m . , i , , s u c> , ) .

Y R e a l G N P , ,f l h e h i q ' , o rl i n g c o ti i lt i \ , . d , h t m c d h ,,

d c f l a t ir i g ti l e w . m m m l I i g t l r u n h ; t i l e h n i - ,l i c h d e l l ; r e; r :

MILIrCC: IMF (' ,al iOus }car:-,): (: IE (' l) (,+arious ~,cat",L

I ' X U r i i t , ' al u m h l d c x o l l : ' a ki s t a n ,

' , , p o l t , , ; ' - , o u r c c :

t i n i t c d N a l i , . ; n ~ ,

( V ~ l i 'i O t l 1 '~ N S t l C ~ ) .

l ' l ) e m i t ' , a l u c i il tl c , ; I e x p o r t , , o l m l 1 - , O l t m ~ c t + u n

t I ' \ . S t + I l l ' C O ; I . ) l l i t C d Ni t t i O I l b , ( \ H I ' i t l H 5 i S ' 4 1 c s J .

/ : 1 l i ] H [ C l '~ t l l O l l l i l l; I I c x t _ ' h ~ l l l ~ C l i l l e

C X l ' U C s s c d

i l l

r u p e e ' , p e r u n i t o f h 'q ci


9/16

EXC HAN GE RATE VOLATI LITY 1233

( 'GR US. CGR,IP, ( 'G RUK , ( ' ,IPUS. ( 'UKUS =

pairwisc cowJrianccs of bilalcral exchange rates. For

exanlplc. ('GRUS is thc covariancc of cxchallgc rates

for Germany and the United Statics.

J( 'OV = j o i n t covariancc, calculated f o r each o l + the

i i l lp , , ) r t i l lg counlrics,

COI11pLIICS h c

clrvarianc o[ ,,..'x-

change rate changes experienced by the country under

COl l~Jdcra lJon and I [ IOSC other Cotlntl-Jcs t i l kc I1 as i l

group: effective exchange rate is created b y weighting

e x c h a n g e r a t e c h a n g e s f o r t i l e c o u n t r i e s i n v o l v e d b V

thei r resp ectiv e shal'CS in ilggrcgillc expo rts .

Tablc A1. Export den land fimction: Linear ]ornl

W e s t G e r m a n y U n i t c d S t a te s J a p a n U n i t e d K i n g d o m

Cons tan t -9 .7 47 - 10.402 - 111.1172 - 10.246 -5 .8 76 -5 .7 74 -2 .6 10

(-4.{)25) (-4.599) (-6.254) (-0.391) (-3.334) (-3.342) (-0.803)

Y (t) 4.tl71 - - 2.418 - - 0.020 - - - -

(3.766) (7.359) (3.020)

Y ( t - 1) - - 4.457 - - 2.3462 - - [).[)2{) 13.383

(4.355) (7.492) (3.[)34) (2.5111)

P X P D -5.19[) -5.558 -9.582 -9.567 -7. 982 -7.935 [).064

- 3 . { ) 5 2 ) (-3.4 69) (-6.3 73) (-6.43 3) (-3.462) (-3.455 ) ([).247)

E {/.726 0.681 {).686 {I .759 164.917 168.917 -0. 001

(2.565) (2.51141 (4.7211 (5.513) (2.874) (2 .992) (- [) .2 47)

S D . . . . 172.743 -184.417 0.002

(- 1.5114) (-1 .61 8) [ ) . 8 4 9 )

M A S D

-2.511 -3.081 -1.2{)1 -1.583 -- -- --

(- 1.791)) (-2 .23 7) (- 1.529) (-2.{)56)

/~2 0.486 0.528 0.872 0.875 0.694 0.694 0.065

D W 2.[)4 1.77 2.5[) 2.29 1.64 1.67 2.18

CONDX 95.96 94.10 45.43 43.41 56.24 54.55 511.99

* F o r a ll t a b le s i n t h e a p p e n d i x , t h e n u m b e r s i n t h e p a r e n t h e s e s a r c t- s ta t is t ic s . S D i s w i t h i n p e r i o d s t a n d a r d

d e v i a t io n o f n o m i n a l e x c h a n g e r a te s : M A S D i s t h e fo u r - qu a r t er m o v i n g a v e r a g e o f S D s ; D W i s t h e D u r b i n - W a t s o n

s t a ti s ti c : C O N D X i s c o n d i t i o n i n d e x f o r m u l t ic o l l in e a r i t y .


10/16

1 2 3 4

W O R L D D E V E L O P M E N T

" I ' a b l c A 2 . E x p o r t c h m a m l . I b m r i o , l o g l i n c a r f i ,r , 1 1 :

W e s t G e r m a n y [ J n i t c d S t a te s J a p a n U n i t e d K i n g d o m

C o n s t a n t 5 . 4 9 7 - 5 . 7 3 4

( - 4 . 5 0 1 ) ( - 4 . 8 2 3 )

Y ( t ) 4 . 1 1 1 3 - -

( 4 . 1 2 4 }

Y ( t 1 ) 4 . 2 , 4 , 4

( 4 . 4 6 7 )

P X / P D

- 1 . 154 - 1 .2 24

( - 3 . 3 1 1 ) 3 . 5 7 9 )

E 11 .974 11 .929

( 2 . 5 1 4 ) ( 2 . 4 5 3 )

S D

- - - -

M A S D - 0 . 7 4 7 - 0 . 8 8 7

( - 2 . 0 0 3 ) ( - 2 . 3 6 6

C V A -', - - - - -

/ ~ 1 1.5 11 0 . 5 3 5

D W 2 . 1 3 8 1 . 8 4 7

C O N D X 1 2 2 .2 2 5 1 2 2 .6 1 7

- 8 . 3 1 t 9

( I I .86O )

3 . 8 9 9

( 8 . 3 9 4 )

- 1 . 5 4 5

( - 5 . 6 9 1 )

0 . 9 2 8

( 3 . 0 2 4 )

0 . 1 ) 7 9

( 11 .798 )

8 . 3 3 4 - 4 . 7 1 ) 2 5 . 4 6 4 5 . 4 2 1

( - 1 2 . 1 3 1 ) ( 0 . 8 0 7 ) ( - - 0 . 9 7 3 ) ( I . 5 1 2 )

3 . 8 9 9 1 . 7 1 1 4

( 8 . 3 9 9 ) ( 2 . 3 8 6 )

- - 1 . 7 7 3 .... 1 . 7 1 5

( 2 . 5 3 2 ) ( 2 . 2 8 7 )

- 1 .541 1 .11~3 - 1 .1 5 6 11 .t 115

( - 5 . 6 8 2 ) ( 3 . 4 1 8 ) t - 3 . 4 2 8 ) (( I. 1)9 9)

11 .939 1 .41C 1 .3 57 I ).4311

( 3 . 1 2 3 ) ( 2 .8 t l8 ) (2 . 8 6 2 ) ( - 0 . 9 4 h )

- -

2 6 . 4 7 6

1 . 4 2 9

- -

( 1 . 2 9 7 ) ( - 1 . 3 5 9 )

().OI)l

( 1 . 0 9 7 )

I ) .9 9 2 - - - -

1 t ) . 8 3 3 )

0 . 8 5 0 1 1. 85 11 1 1 . 6 71 1 . 6 7 2 0 . 0 5 8

1 . 8 5 6 1 . 8 5 3 1 . 7 5 3 1 . 7 5 8 2 . I111

7 1 . 6 7 8 7 1 . 5 5 8 4 4 1 1. 6 57 4 3 3 . 1 7 3 2 2 1~ .3 0 2

" ] ' h c v a r i a b l e s m e a s u r i n g e x c h a n g e r a t e r i sk a r c n o t c x p r c s s c d i n l o g t e r m s .

+ ( ' V A = c o e f f i c i e n t o f w t r i a l i o n .

T a b l e A 3 .

E a l ~ or t d e m a m l l h m t i o , - - I o g -l il e a r f i , r m 2

W c s t ( i c r m a n y U n i t e d S I: At cs

Japan

U n i t e d K i n g d o m

( ' o n s l a n l - - 5 . 5 2 6 - 5 . 7 6 2 - 7 . 3 9 2 - 7 . 4 0 1 - 7 . 8 9 5 - 7 . _ _ ) 5 . 1 7 5

( - 4 .= . . ) ~ S ( - 4 . 4 9 6 ) ( 5 . 7 8 7 ) ( 5 . 1 ~ 5 8 ) ( 1 . 4 5 5 ) ( 1 , 3 3 3 ) ( 1 . 4 4 ~ )

Y ( t ) 3 . 6 9 S - - 3 . s 5 3 - - 2 ) ~2

( 3 . 9 5 3 ) C , e, .2 95 ) ( 2 . 9 3 6 )

Y ( t - I ) - - 3 . S 9 9 - - 3 . ( ~ 5 1 . 9 4 4 ( I. 11~ 7

( 4 . 2 3 7 ) ( 8 .( } 19 ) ( 2 . S 1 4 ) 2 2 ~,

P X / P D

- 1 ( )70 - I . J 23 - 1 . 50 0 1 .5() ( ) I . 122 I . ti t ) ( ) [I .( l l 3

( - 3 . 1 2 1 ) ( - I . 1 2 3 ) ( - 5 .4 7 1 , .I ) ( 5 . 3 6 2 ) ( 2 . S l 4 ) ( 2 . S 5 8 ) ( I .( I S ~ ,)

E 1 . 0 1 1 3 0 . 9 6 8 1 1 . 63 5 1 1 . 7 77 1 . 2 4 4 1 . 2 7 4 11 .427

( 2 . 5 3 7 ) ( 2 . 4 5 9 ~ ) ( 1 . 3 4 8 ) ( I . ( G 2 ) ( 2 . 8 1 4 ) ( 2 . 8 5 8 ) ( 1 1.9 43 1

N D . . . . 1t .I )57 0 . t l5 9 I I. t l(~l

( - I . 4 1 7 ) ( 1 . 4 34 ) ( I . 1 9 4 )

M A S D 11. 149 - ( I . 171~ 11.1114 ( )Al l 3

( - 1 . 7 1 3 ) ( 2 . 11 1 7) 1 1 . 0 1 8 1 ( 0 . 8 9 3 1

/~ e I ) .4 98 t ) .51 s t l .8 51 11.t~44 0 . 67 3 0 . ( ff ),~ [1 . t 164

D W 2 . 108 1 .8 _ . I ., '4 ,53 1 .5114 1 .8 27 1 . 85~ 2 .0611

C O N D X 1 2 2 .7 0 3

2 2 . 9 4 5

1 1 4 . 7 3 5 1 1 5 .( )1 2 4 3 7 . 2 t l 8 4 3 3 . 2 3 4 2 3 3 . 3 2 1

~ A I I ~ . a r h d q c s , i n c l u d i n g m e a s u r e s o f r i s k , a r c i l l l o g t e r n > .


11/16

E X C H A N G E R A T E V O L A T IL I T Y

T a b l e A 4 .

Er po rt denland Jiulction the lagged del~emh nt variable

1235

W e s t G e r m a n y U n i t e d S t a t e s J a p a n U n i t e d K i n g d o m

C o n s t a n t - 1 0 . 8 5 3 - I 1 . 3 2 8 5 . 1 35 - 2 . 6 9 2

( - 4 . 6 0 0 ) ( - 5 . 4 2 6 ) ( - 2 . 7 9 6 ) ( - 0 . 8 2 0 )

Y ( t - I ) 4 .675 2 .567 11.1 )18 14 .153

( 4 . 3 6 2 ) ( 6 . 1 8 1 ) ( 2 . 7 3 9 ) (2 . 5 4 2 )

P X / P D

- 5 . 5 1 5 - 1 0. 11 27 - 7 . 9 6 9 1 1.0 87

( - 3 . 4 1 9 ) ( - 6 . 2 7 9 ) ( 3 . 4 7 2 ) (I). 33 (I)

E 11.681 11.874 157.07 3 -0 .0 01

( 2 . 4 8 9 ) ( 5 . 3 9 7 ) ( 2 . 7 2 7 ) ( - ( 1 . 9 1 9 )

X t -

1 -I ). 1116 -11.0 98 (1.144 -11.1188

( -0 .7 32 1 ( -11 .8141 ( I .1120) ( - I L 538)

S D - - - - - 185.271~ 11.0112

( - 1 .6261 (I) .8851

M A S D - 3 .1 19 6 - 1 .6 5 2 - - - -

( - 2 . 2 3 5 1 ( - 2 . 1 2 3 )

R -~ 0.5 22 0.87 4 0.695 0.(148

D W 1 .552 2 . t l99 1 .851 2 .027

C O N D X 1116.679 62 .311 611 .561) 56 .79 2

T a b l e A 5 . Exp ort de m an d .[imc t ion t inle lags in relative price and exchange r.lle

W e s t

G e r m a n y U n i t e d

S t a t e s J a p a n

U n i t e d K i n g d o m

C o n s t a n t - 4 . 7 7 1 - 9 . 6 9 9 - 4 . 9 5 4 - 2 . 5 0 6

( - 1 .5 8 3) ( - 5. 7 1 1 9) ( - 2 . 6 6 9 ) ( - 0 . 5 5 6 )

Y t ) - - 2.3211 I).1)13 12.1811

( 6 . 7 5 2 ) ( 1 . 6 9 3 ) ( 2 . 0 2 3 )

Y t - 1) 1 .4118 - - - - - -

( 0 . 9 6 3 )

P X / P D - 5 . 7 4 3 - 9 . 1 4 3 - 7 . 9 8 9 - 0 . 0 3 0

( - 3 . 6 7 0 ) ( - 5 . 9 1 7 ) ( - 7 . 9 8 9 ) ( - ( I . 11 2)

( - 11 3 . 3 5 0 - 0 . 4 8 1 - 0 . 4 5 0 - 0 .1 3 1 1

( 2. (1 11 8) ( - ( 1 . 2 9 5 ) ( - 1 1 . 1 8 4 ) ( - 0 . 4 7 2 )

( - 2 ) -11 .1115 -2 .2 61 1 .7115 0 . 115

( -11 .1111) ( - 1 . 171 ) (0 .6 95) (0 .41 5)

- 3 ) 1.622 3.2 58 0.2112 I) .2 94

( 1.1 72 ) ( 1.7821 10.1185) ( 1.0461

E 1.3119 5 .1 97 246 .,"; 14 11.(1112

( 2 . 0 4 9 ) ( 0 . 7 7 2 ) ( I . 9 8 3 ) ( - 0 . 7 9 3 )

( - 1 ) - 1 .359 ,.894 265 .971 (I.1101

( - 1 . 3 1 0 ) ( 11 .9 62 ) ( - I . 3 9 7 ) ( 0.2 71 1)

- 2 ) 1.11116 2. 105 2 8 8. 9 99 11.0112

( 1.11t151 ( - 1.3 59) (1 .5 70 ) {I).5671

( - 3 ) - 0 .tl (-~0 1 .680 -6 5 . 01 5 - ( ) .0112

( -( I. (1 9( I) ( 2 . 3 1 3 1 ( - 0 . 5 6 9 ) ( - 0 . 8 5 9 )

S D - 5 . 7 8 7 - 2 1 6 . 1 5 7

( - 0 . 7 3 7 ) ( - 1 .6 36 1

M A S D 1 .5 4 7 - - - - 0 .1 10 5

( - I llt)l))

( I .

1311)

R 0 . 5 6 8 0 . 8 8 0 0 . 6 9 2 - 0 . 0 5 9

D W 2 . 1 1 1 9 2.3 65 1.561 2.1185

C O N D X 229 .7 93 3 .287 .a t111 227 .2 34 178 .7311


12/16

1236 WO RL I) I)EVI21A)I'M EN I

"l'ablc ,'\6. t : ~ p o r l d e m a m l ,l~mclioH -- c ~ c h a n ~ e r i . s k i t t r e a l l e r n t s

West Germ an'+ Uni ted Statics Japan (ll++itcd Kitlgdom

('Oll Y,I:.lll

Y t )

Y t I )

t ' X / I ' I )

E

M A S D

R ~

DW

( 'ONDX

- 7.72(1 8.235 (~.417

3.48 (1) (-5.185) ( 3.1~1

II t 22

(3.0S2)

3 . 4 4 4 2 . 1 7 6

(3.611 ) ((i.425 }

3. (139 - 9. (~(~8 (i. 896

2.519) (-(i.49 91 (- 2.933)

11.471 11.71(I 113.(~(15

(1.541) (5.205) (1.728)

1.352 1.(114 193.~C5

1.244) ( - 1.6891 (11.92~;)

11.4tl2 tl.844 11.~27

1.734 2.202 1.6,'.;9

S1.2711 4 8 . 8 1 1 ) (10.298

I

171

(3.5(17)

111.1163

(1.77a)

11.113S

(o.152)

-II. 150

1 1 . 3 7 i )

I).111)5

2. IS,S

54.34O

(' al cu hi tc d for r.:tl exchange rates.

Tablc A7.

E f f ~ o r t d e m a n d l h t l c m m e . ~ c h a n g c r A k i n r e a l g rc m't l* t e r m s

WCM (}crnlany lJni tcd SIilICS l i l p i l n llnitcd Kingdom

('onstant 7.03(I

( 3 . 0 9 4 )

Y It-l) 3.021

(3.358)

I ' X / P D - 3 . 1 6~

- 2 . 2 4 0 )

E 0.516

(I .650)

S l ) :

MASD -O.O42

(-0.422)

I? O.379

DW 1+715

('()NDX 7(~.529

-7 .9 00 --4.472 ll.N311

(5. 171 ) ( -2 .501) (0233]

2.361 0.1117 10.3,'e,7

(7.949) {2.6(121 (I .S35)

9.890 --&447 0.011

-6.893) (-3.74 5) (o.o43)

11.617 182.4911 -11.tl01

(5.766) (3.1157) { 1.439)

II.2111 II.0Sl

(- I.(-,02) (-0 .71 5)

11.474

-2.471)

11.N5(i 11.(141 11.(115

2 . 2 7 2 1 3 ) 2 3 2 . 177

44.1)32 55.232 54.1153

+ ' a l c u l a t c d o n t h e b a s is o f p e r i o d t o p e r i o d p e r c e n t a g e c h a n g e i n t h e r e a l c x c h : m g c

GILL'.


13/16

E X C H A N G E R A T E V O L A T I L I T Y 1 23 7

T a b l e A 8 . E x p o r t d e m a n d . [ im c t io n w i t h t h i r d c o u n t r v e f fe c t s W e s t G e r m a n y

E s t i m a t e d c o e f f i c i e n t s

C o n s t a n t - 1 2 . 0 5 1 - 1 1 . 9 5 5 - 1 2 . 9 0 0 - 1 1 . 8 4 2 - 1 11 .3 51 - 9 . 8 5 6

( - 3 . 8 8 4 ) ( - 4 . 2 6 5 ) ( - 4 . 5 1 4 ) ( - 4 . 4 5 6 ) ( - 4 . 7 8 9 ) ( - 4 . 8 9 3 )

Y t ) 4 . 4 1 1 - - 4 . 8 6 5 - - 4 . 3 7 4 - -

( 3 . 8 3 4 ) ( 4 . 5 7 3 ) ( 4 . 5 4 0 )

Y ( t - l ) - - 4 . 6 3 3 - - 4 . 7 1 1 - - 4 . 2 2 6

( 4 . 3 1 0 ) ( 4 . 5 8 2 ) (4 . 6 6 1 )

P X P D

- 6 . 1411 - 5 . 8 8 3 - 7 . 1 6 2 - 6 . 4 9 3 - 6 . 1 18 2 - 5 . 6 2 8

( - 3 . 0 2 1 ) ( - 3 . 1 6 5 ) ( - 3 . 9 8 8 ) ( - . 3 . 8 2 6 ) ( -3 . 95 1 1 1 ( - 3 . 8 9 9 )

E 1 . 27 4 1 .( 157 1 .2( 11 0 . 9 87 1 ) .734 11 .691

( 2 . 6 2 9 ) ( 2 . 2 4 4 ) 1 2 . 8 7 1 ) ( 3 . 3 3 1 ) ( 2 . 7 6 6 ) ( 2. 61 1 2)

M A S D G ( I. 21 1 - 0 . 9 9 5 -I ) .3 1 ) 4 - 1 . 1 9 0 - - - -

((I. 1 1 1 2 ) ( - 0 . 4 8 2 ) ( - 1 1 . 1 5 7 ) ( - 0 . 6 0 0 )

M A S D U S - 0 . 2 1 6 - I ) . 3 2 1 - () .( X) 5 - 0 . 0 7 2 - - - -

( -1 1 .4 1 )2 ) ( - 0 . 6 1 8 ) ( - 0 . 1 1 1 0 ) ( - 0 . 1 4 7 )

M A S D J - 3 1 1 9 .3 2 4 - 2 3 4 . 1 1 1 - 2 5 5 . 6 3 0 - 1 5 4 .2 3 3 - - - -

( - 1 . 4 2 6 ) ( - 1 . 1 3 6 ) ( - 1 .3 1) 1) ( - ( I . 8 0 0 )

M A S D U K - 11 .1 10 6 - 0 . 1 10 5 - 1 1 . 0 05 - 0 . 0 0 4 - 0 . 0 0 6 - 0 . 0 0 6

( - 1 . 61 8 1 ( - 1 . 39 4 ) ( - 1 . 5 40 ) ( - 1 . 2 69 ) ( - 2 . 4 3 0 ) ( - 2 . 4 4 6 )

C G R U S I ) .0 7 8 0 .1 )9 1 - - - - - -

( 1 . 0 1 9 ) ( 1 . 2 2 6 )

C G R J P - 0 . 0 1 8 - 0 . 0 1 3 - - - - - -

( - / ) . 6 4 7 ) ( - 1 t . 4 7 8 )

C G R U K 0 .1123 11 .025 . . . .

( 1 . 2 6 8 ) ( 1 . 4 3 5 )

J C O V - - 1 . 3 4 1 1 . 0 3 7 1 .2 81 1 1 1 .9 9 9

( 2 . 2 8 7 ) ( 1 . 7 9 1 ) ( 2 . 2 2 2 ) 1 1 . 7 6 6 )

/~ 2 0 . 4 7 5 0 . 5 1 5 0 . 5 4 7 0 . 5 4 8 0 . 5 5 3 0 . 5 6 1

D W 2 . 3 9 9 2 . 1 1 9 2 . 3 9 4 1 . 9 7 0 2 . 1 6 7 1 . 8 4 3

C O N D X 1 31 1. 55 3 1 2 3 . 6 7 2 1 2 9 . 8 6 1 1 2 2 . 3 0 6 9 7 .1 1 14 9 1 . 2 6 6


14/16

1 2 3 8 W O R L D D E V E L O P M E N T

T a b l e A g . f ] .~ p o rl d e m a n d . l i m c l i ~ m w i l h l h i r d - c o t t n t r v C [li c /.v - -- Th,:' U n i w d .S l al e~

E s t i m a t e d c o c l f i c i c n ls

( ' o n s t : m t - t 0 . 3 7 5

( - 5 . 3 1 1 )

Y ( t ) 2 . 167

(5.211(,)

Y

I t - l )

l X / l l ) 8 . 2 1 I

4 . 6 5 S f

1; 11.721

(5 .S3~0

M A S I ) G 3 . 0 7 1

I 1 . 3 2 5 }

M A S I ) t J S 1 . 7 8 3

{ 2 . 2 )

M A S D U K I ). 11 tl 2

( I ) . 4 S 3 )

( ' ( I P , U S o . IS3

(- 2.~)05)

( ' . IP U S ( I. 10 (I

( 1 . 5 7 2 )

( ' U K U S I L I G 3

(

o . I h S t l

, I ( ' ( ) V

R ~ 1 1 . 8 9 4

l ) W 2.3211

( ' ( ) N I ) X

77. 130

10.2 45 I 1.52 5 I 1.32S ~L933 10. 1113

( 5 . 5 0 1 ) ( 5 . 4 9 2 ) ( 5 . 4 ( ~ 4 ) ( ~ . ( ~ 7 1 ) ( 7.11141

2 .491 2 .32 I

( 5 . 4 5 3 ) ( 7 . S 3 1 h

2 . 197 - - 2 . 4 7 2

( 5 . 5 3 5 ) ( 5 . 4 5 2 )

,~. 7S(~ ,~.(12(~ 8 .6 15

5 .0731 ( 3 .9671 ( 4 .21 4)

0 .770 t1 . ( ,55 0 .72q

13.5~7) (4.11871 14.S1151

2.3 34 2.7t l3 1 S~)2

(

1 ( )2 N )

(1 .002) ( ( ) .~ t ;5 )

2.1197 1.3(~ 1 .732

2.8(12) ( I . ( , ) S ) ( 2 . 1 2 2 1

I).(1(12 0.( 1tl l I1.11(1

11.577) ( - 0 .3 2u ) ( 11.4331

II. 195

3 . 2 1 4 )

[ I . I I i t l

I d , 1 5

0 .1141 - -

1.11471

0 . 4 9 2 0 . 4 7 7

( - ( I . 5 S 5 1

( 1 1 . 5 ( , 7 )

(I.)(111 O. g(', 5 (1.N 65

2 .121 2 .591 2 .321

7 3 . 9 7 0 7 6 . 9 2 4 7 4 . 9 3 7

9 . 7 1 ~

I 7 . 1 9 8 )

0 .741

( 5 . 3 9 2 )

1 . 7 1 L ~

( 2 . 2 h n )

( 2 .S63)

I). llll)

( 1 . 7 ~ 5 )

I L S 9

2 . 2 7 7

4 ~ . 2 7 4

2.2,"-;I

( S . 2 7 4 3

u . 75 5

( 7 . 4S2 3

I L 7 9 S

(~~.2473

2 . o 5 5

2 . S 3 5 3

I L I S 3

I I , I ) g5

I).9115

2.11~9

4 4 . 1 4 0


15/16

EXC HAN GE RATE VOLATILITY 1239

Tablc A I0. E x p o r t d e m a m l , / h n c l i o n w i t h t h i r d c o u n t r y < {/~ c t,~ - - J a p a n

Estimated coefficients

C o n s t a n t

Y (t)

Y ( t - l )

P X / P D

E

M A S D G

CVAG

S D J

M A S D J

CVAJ

M A S D U S

CVAUS

S D U K

M A S D U K

C G R J P

C J P U S

C J P U K

t l ~

D W

CON DX

-2.952

(-1.332)

0 . 0 2 2

2 . 9 7 8 )

- 10.300

-3.448

I06.755

(I .689)

-4. 167

(- 1.220)

166.474

(0.671)

2.692

(2.588)

0.001

(0.138)

-0.039

(-0.847)

O .

1 4 7

(1.472)

0.114

(2.049)

0.718

1.810

83.309

-2.604 -3.376 -3.195 -4.316

(-1.151) (-1.578) (1.502) (-2.333)

- - 0.017 - - 0.018

(2.450) (2.663)

0.020

(2.709)

-9.832

(-3.263)

119.087

(I .877)

-3.958

- 1 . 1 4 0 )

125.107

(0.498)

2.634

(2.462)

0.001

(0. 186)

-O.O36

(-0.781)

O. 140

(1.382)

O. 105

1 . 8 1 ~ 2 )

0.707

1.833

80.935

7.782

(-3.584

131.666

(2.923)

1.986

(2.116)

0.710

1.684

57.197

-3.998

(-2.235)

0.016 - - 0.019

(2.336) 12.851)

-7.6119 -8.791 8.527

(-3.518) (-3.782} (3.715)

134.064 16 9. 32 0 154.652

(2.971) (2.980) (3.074)

1.987

12.101)

- 1 8 . 1 0 6

(-2.895)

-163.325

(-2.895)

18.653

(1.830)

0 . 0 0 5

(1.857)

O.265

(2.258)

I).077

(2.154)

0.761

1.872

77.351

[ ) . 7 0 7

1 . 7 1 7

5 6 . 1 9 8

-181403

(-2.92H)

-8.365

(-I .588)

18.864

(1.842)

0.005

(1.967)

0.263

12.217)

0.073

(2.073)

0.759

1.887

72.634


16/16

1240 W O R L D D E V E L O P M E N T

T a b l e A l l .

Exlmrt demand .limcti(m with third-country ~[l~ cts The United Kb gdom

E s t i m a t e d c o e f f i c i e n t s

C o n s t a n t , 5 . 6 9 1

1 . 3 4 I )

Y t ) - 1 . 8 1 4

( 0 . 2 3 1 )

Y

t - l )

PX/PD

- 0 . 1 9 4

( 0 . 7 1 5 )

E - 0 . 0 0 2

( - 1 . 4 5 7 )

M A S I ) G 3 . 9 6 8

1 . 2 4 0 )

M A S D . I 269.441

( I . 0 7 3 )

M A S I ) U S 1 . 5 3 6

( 1 . 7 3 5 )

M A S D U K _1).()()(~

( ( 1 . 8 9 4 )

C G R U K 11.()111

( 0 . 4 3 9 )

( ' J P U K

0 . 021

( 0 . 4 1 9 )

( ' U S I . J K ( I . ( ) 2 7

(11.432)

. I ( O V

~2

(1.1)99

l ) W 2 . 2 3 2

C O N D X 1 0 3 . 7 5 7

0 . 8 1 7 6 . 1 4 6 1 . 6 22 5 . 0 5 3 - 2 . 7 8 1

( ( I. 1 7 8) ( 1 . 2 7 2 ) ( 0 . 3 8 3 ) ( 2 . 9 3 t ) ( - 0 . 9 3 8 )

- - 0 . 3 85 - - - -

- o . 0 4 ~ )

11).1)81

( I . 167 )

- 0 . 1 2 4

- I , 4 6 8 )

- 0 . 0 O 2

1 .718 )

4 . 4 5 I

1 . 4 2 6 )

48 . 145

( 0 . 199)

1.171

( I . 5 1 3 )

--(I.()()(~

0 . 9 8 2 )

1) .002

- ( ) . 102 )

O.O44

( O .822 )

) . 0 4 4

( ( ) .666)

0 . 1 3 4

2 .2 ( )~

1(14.862

8 . 5 4 1

( I . 1 4 1 )

- 0 . 2 3 3 - 0 . 1 68 - - -

- 0 . 8 9 0 ) ( - 0 . 6 4 9 )

- 0 . 0 ( 1 2 - 0 . 0 0 2 - ( I . ( ) 0 1

( 1 .6112) ( 1 .798 ) ( 1 .334 )

4 . 3 9 1 4 . 6 t l 2

( 1 . 4 2 4 ) ( 1 . 5 3 4 )

261 . ( )05 113 .381 373 .890

(1 .097 ) (11 .5511) (2 .492 )

1.513 1 .1116 1 .261

1 . 9 1 6 ) 1 .5 1 2 ) 2 . 1 7 I )

- 0 . 0 0 5 O 0(1 5 -

( 0 . 8 7 7 ) ( ( I . 8 1 2 )

0 9 2 2 - 1 .0 9 5 - -

( ( I . { ' ~ 7 0 ) ( ( I . 8 2 2 )

I).

1 3 5 0 . 1 6 ~

I.

170

2 .2 09 2 . 173 2 . 184

102 .7 12 94 .33 (~ 27 . 138

1 5 . 2 3 4

( 2 . 9 4 3 )

-() . ()(12

( - 1 .667 )

3 . 2 3 6

1 . 8 4 4 )

q).

102

2.11~

4 3 . 3 4 7

Documents

Exchange Rate Volatility and Pakistan's Exports