The Effect of Exchange Rate and Exchange Rate Uncertainty on Domestic Consumption in SAARC Member Countries from 2005 to 2020

Abstract

The exchange rate and its uncertainty are the key economic variables that influence other macroeconomic variables through various channels. Domestic consumption will be influenced by the exchange rate and its uncertainty. This research investigates the impact of the exchange rate and its uncertainty on the private sector consumption of the member countries of the South Asian Association for Regional Cooperation (SAARC) from 2005 to 2020. The data has been extracted from the World Bank websites, the Asian Development Bank, and the Ministry of Finance of Afghanistan. The uncertainty of the exchange rate data has been extracted using the ARCH method, and the research model has been estimated using the GLS method. The research results indicate that the exchange rate and its uncertainty have a significant and positive effect on private-sector consumption. The positive relationship between the exchange rate and its uncertainty with consumption is consistent with the theory of currency pass-through. Additionally, the impact of income on domestic consumption is positive and statistically significant, while the impact of government consumption expenditure on private-sector consumption is negative and significant.