Export Demand within SAARC Members: Does Exchange Rate Volatility Matter?

This paper examines the impact of currency volatility on the export demand within the SAARC region, covering Bangladesh, India, Pakistan and Sri Lanka. We model the conditional exchange rate volatility using a multivariate asymmetric CCC-GARCH model and applied the bound testing approach on the standard trade model framework. Our result shows that there exists evidence of significance long-run steady state equilibrium where foreign income, real exchange rate and exchange rate volatility does affects export decisions of producers in the region of SAARC. Real exchange rate volatility was found to have a significant and negative impact on the export demand of most of the SAARC countries. This implies that higher exchange rate fluctuation does not encourage intra-regional trade within SAARC region