The Impact of Exchange Rate Volatility on Trade Openness in Afghanistan: An ARDL Approach

Abstract

This study investigates the short-term and long-term impacts of exchange rate volatility on trade openness (TO) in Afghanistan over the period 1980–2024. This applied research employs an analytical econometric approach. To capture the dynamic interactions among exchange rate volatility (measured via a moving standard deviation), economic growth (control variable), and trade openness, the Autoregressive Distributed Lag (ARDL) bounds testing approach was utilized. Annual data were gathered from reputable international and domestic sources, including UNCTAD, the World Bank, and Da Afghanistan Bank, and analyzed using EViews 13. While unit root tests confirmed a combination of level and first-difference stationarity among the variables, the bounds test found no statistical evidence of a stable, long-term equilibrium relationship. Short-term dynamics modeled through ARDL (1,3,0) revealed that the contemporaneous effect of exchange rate volatility, alongside its first and second lags, had no statistically significant impact on trade openness. However, the third lag of exchange rate volatility showed a positive and statistically significant impact at the 5% level (67.56), a finding further validated by the Wald test. Additionally, the Granger causality test indicated a unidirectional causal relationship running from trade openness to economic growth. Diagnostic tests (Breusch-Godfrey, Ramsey RESET, and Jarque-Bera) confirmed the absence of functional misspecification and verified the validity of the model's estimates. The findings demonstrate that the impact of exchange rate volatility on Afghanistan's trade openness is neither immediate nor long-term; rather, it manifests positively with a three-year lag. This delay underscores that adjusting contracts, prices, and trade decisions in response to exchange rate uncertainty is a time-consuming process for local businesses. Consequently, policy recommendations include proactive exchange rate management by the central bank to mitigate transactional risks, alongside developing domestic production supply chains and diversifying export products to strengthen the country's economic competitiveness.