Long-Run And Short-Run Dynamics Of Foreign Exchange Reserves Flows And Domestic Credit In Pakistan
AbstractThis study formulates and examines the monetary approach to the balance of payments by incorporating the currency substitution version of money demand function for Pakistan over the period 1962-2005 using FM-OLS and Johansen-Juselius cointegration techniques. The results suggest that real output, real exchange rate and domestic credit play an important role in the determination of foreign exchange reserves in Pakistan in long-as well in short-run. Moreover, the monetary authorities sterilize foreign exchange reserves by 12% in long-run and 66% in short-run. The results support the evidence of long-run causality running from reserves to domestic credit. One important policy implication from the empirical analysis is that the validity of the monetary approach to the balance of payments and the effectiveness of monetary policy depend on the nature of the money demand function. As the specification of money demand has changes the evidence based on monetary approach has also changes.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by Euro-American Association of Economic Development in its journal International Journal of Applied Econometrics and Quantitative Studies .
Volume (Year): 5 (2008)
Issue (Month): 1 ()
Contact details of provider:
Web page: http://www.usc.es/economet/eaa.htm
Find related papers by JEL classification:
- F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General
- F31 - International Economics - - International Finance - - - Foreign Exchange
- E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
- C20 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - General
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Alawode , Abayomi A., 1997. "Some Criticisms of the Monetary Approach to the Balance of Payments," Economia Internazionale / International Economics, Camera di Commercio di Genova, vol. 50(1), pages 13-25.
- Khan, Muhammad Arshad & Sajjid, Muhammad Zabir, 2005.
"The Exchange Rates and Monetary Dynamics in Pakistan: An Autoregressive Distributed Lag (ARDL) Apporach,"
6752, University Library of Munich, Germany.
- Muhammad Arshad Khan & Muhammad Zabir Sajjid, 2005. "The Exchange Rates and Monetary Dynamics in Pakistan: An Autoregressive Distributed Lag (ARDL) Approach," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 10(2), pages 87-99, Jul-Dec.
- Hargreaves, Colin P. (ed.), 1994. "Non-Stationary Time Series Analysis and Cointegration," OUP Catalogue, Oxford University Press, number 9780198773924.
- Peter C.B. Phillips, 1988.
"Optimal Inference in Cointegrated Systems,"
Cowles Foundation Discussion Papers
866R, Cowles Foundation for Research in Economics, Yale University, revised Aug 1989.
- Granger, C. W. J. & Newbold, P., 1974. "Spurious regressions in econometrics," Journal of Econometrics, Elsevier, vol. 2(2), pages 111-120, July.
- Wilford, D Sykes & Wilford, Walton T, 1978. "On the Monetary Approach to the Balance of Payments: The Small, Open Economy," Journal of Finance, American Finance Association, vol. 33(1), pages 319-23, March.
- G. Booth & Mustafa Chowdhory, 1992. "Canadian foreign exchange policies: Intervention, control, cointegration," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 128(1), pages 21-33, March.
- Arango, Sebastian & Ishaq Nadiri, M., 1981. "Demand for money in open economies," Journal of Monetary Economics, Elsevier, vol. 7(1), pages 69-83.
- Bahmani-Oskooee, Mohsen & Techaratanachai, Ampa, 2001. "Currency substitution in Thailand," Journal of Policy Modeling, Elsevier, vol. 23(2), pages 141-145, February.
- Banerjee, Anindya, et al, 1986. "Exploring Equilibrium Relationships in Econometrics through Static Models: Some Monte Carlo Evidence," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 48(3), pages 253-77, August.
- Connolly, Michael & Taylor, Dean, 1976. "Testing the Monetary Approach to Devaluation in Developing Countries," Journal of Political Economy, University of Chicago Press, vol. 84(4), pages 849-59, August.
- Mohammad Ahmed, 1992. "Pakistan's Exchange Rate Policy: An Econometric Investigation," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 31(1), pages 49-74.
- Craig S. Hakkio & Mark Rush, 1990.
"Cointegration: how short is the long run?,"
Research Working Paper
90-08, Federal Reserve Bank of Kansas City.
- Edward Tower, 1975. "Money demand and the terms of trade," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 111(4), pages 623-633, December.
- Johnson, Harry G, 1977. "The Monetary Approach to Balance of Payments Theory and Policy: Explanation and Policy Implications," Economica, London School of Economics and Political Science, vol. 44(175), pages 217-29, August.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (M. Carmen Guisan).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.