On Nominal and Real Devaluations Relation: An Econometric Evidence for Pakistan
AbstractThe economy can be affected, either positively or negatively, by the process of devaluation of local currency. An improvement in trade balance is considered as one of the most significant and beneficial impacts of devaluation. However, higher inflation would lead to expensive imports that offset the growth of economy resulting from an increase in exports. This reduces the effectiveness of devaluation to reduce the trade deficit. The benefits of devaluation are restricted where inflation severely hits the economy. Moreover, nominal devaluation of exchange rate improves the trade balance when it leads to real devaluation of exchange rate. The present study is also an attempt to explore the long run and short run relationship between nominal and real effective exchange rates. The study is one of the a unique attempt in the case of Pakistan as devaluation has always been a politically sensitive issue. The order of integration has been found through Ng-Perron (2001), whereas ARDL and DOLS are employed for long run correlations. The findings clearly indicate that nominal devaluation not only leads to real devaluation in long run but also in short run. This scenario provides directions for policy-makers to take into consideration both positive and negative implications of devaluation in Pakistan.
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Bibliographic InfoArticle provided by Euro-American Association of Economic Development in its journal International Journal of Applied Econometrics and Quantitative Studies .
Volume (Year): 9 (2009)
Issue (Month): 1 ()
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- F10 - International Economics - - Trade - - - General
- C20 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - General
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models &bull Diffusion Processes
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- Faridul, Islam & Mohammad, Iqbal Tahir & Muhammad, Shahbaz, 2012. "Income terms of trade and trade balance: the long run evidence from Bangladesh," MPRA Paper 38384, University Library of Munich, Germany, revised 24 Apr 2012.
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- Shahbaz, Muhammad & Tiwari, Aviral Kumar & Tahir, Mohammad Iqbal, 2013. "Analyzing Time-Frequency Relationship between Oil Price and Exchange Rate in Pakistan through Wavelets," MPRA Paper 48086, University Library of Munich, Germany, revised 05 Jul 2013.
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