Remittances-Exchange Rate Nexus: Evidence from Pakistan

Abstract

The major goal of this study was to estimate the remittances-exchange rate nexus in Pakistan. For this purpose, it adopted a two-step procedure to examine the short-run and long-run nexus between exchange rate and remittances in Pakistan from January 1980 to April 2018. In the first step, an ARMA-GARCH model was utilized along with the generated conditional variance as the measure of the volatility of remittances and rate of exchange, respectively. In the second step, ARDL framework was utilized to check both the long- and short-run nexus between rate of exchange and inflation. The result revealed that past remittances and exchange rate affected current remittances and rate of exchange, significantly. Furthermore, it was also shown that exchange rate has a significant and positive effect on remittances and the volatility of rate of exchange has a significant and positive effect on exchange rate in the long-run. The test of causality showed that a bidirectional causality exists between remittances and the volatility of remittances, as well as between rate of exchange and the volatility of rate of exchange. Thus, it is suggested that the government needs to formulate policies to maintain the stability of exchange rate. Moreover, strong capital and financial markets are required to mitigate the risk of exchange rates.Keywords: exchange rate, remittances, volatility