A structural VAR analysis of the impact of macroeconomic shocks on Pakistan's textile exports

This paper creates a structural vector autoregression (SVAR) model which looks at the macroeconomic factors that impact the export of both finished and unfinished Pakistani textiles between 1980 and 2011. The analysis is unique in two ways: first, it separates unfinished (low value-added) textile exports from finished (high value-added) textile exports; second, it separates out the impact of aggregate exchange rate changes with respect to trading 'partners' from aggregate exchange rate changes with respect to trading 'competitors'. We find that unfinished, or low value-added, Pakistani textile exports were positively impacted by the aggregate consumption of trading partners while finished, or high value-added, textile exports were negatively affected by these shocks. Also, a real depreciation of the Pakistani exchange rate leads to temporary increases in unfinished textile exports but sustained increases in the level of finished textile exports. Finally, positive shocks in the textile exports of competitor countries lead to temporary decreases in both unfinished and finished Pakistani textile exports, but these falls were followed by eventual increases in the exports of both.

► We analyze the macroeconomic factors that affect Pakistani textile exports. ► We separate finished and unfinished Pakistani textile exports. ► Higher consumption of trading partners increases low value-added exports. ► Higher consumption of trading partners decreases high value-added exports. ► A depreciation leads to increases in the level of finished textile exports.