Assessing the Impact of Rule of Law, External Debt, and Exchange Rate Volatility on Domestic Consumption in SAARC Countries

Abstract

This paper investigates the relationship between rule of law, exchange rate volatility, external debt, and domestic consumption in SAARC countries from 1995 to 2022. Using a panel dataset, the study employs a random effects model to analyze the associations. Findings reveal that inflation rate, GDP growth, exchange rate, and rule of law positively link with domestic consumption, while external debt, interest rate, and exchange rate volatility exhibit negative associations. Granger causality analysis indicates that external debt granger causes exchange rate volatility, and there is bidirectional causality between domestic consumption and both external debt and exchange rate volatility. The study also suggests some policies to affect domestic consumption.