Yuan as a Medium of Trade: Volatility in Bilateral Exchange rate of China and Pakistan

Abstract

The paper presents a quantitative study on the bilateral exchange-rate volatility of Chinese and Pakistani currencies by considering their bilateral trade. For the impact assessment, trade data of major industries were considered, and the “Ng Perron” unit root test has been employed. The Unit root tested the stationarity of the exports and imports for both partners, and the outcome implied the use of the error correction method. Moreover, the Johansen co-integration technique has also been applied to confirm the existence of co-integration. We found evidence that variability in the exchange rate has a mixed impact on a few exporting and importing commodities both in the long-run and in the short-run, however, only a few commodities were impacted negatively. Thus, policymakers of both countries can consider Yuan as a medium of exchange while trading.