Exchange Rate and Trade: A Causality Analysis for Pakistan Economy
Abstract: This paper investigates the direction of causality between exchange rate and trade (exports and imports) for a developing country like Pakistan, utilizing the monthly time series data covering the period 1995-2006. Cointegration and causality tests were conducted to assess the link between trade and exchange rate. The results of Johansen-Juselius (JJ) cointegration tests indicate that there is one cointegrating vector between exchange rate, exports and imports. However, an important finding of this empirical research is that there is a strong and stable relationship between exports and imports, and the causality is bidirectional. This study also rejects previous findings about negative effect of exchange rate volatility on trade volume in a developing economy like Pakistan.
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Bibliographic InfoArticle provided by IUP Publications in its journal The IUP Journal of Applied Economics.
Volume (Year): VIII (2009)
Issue (Month): 5-6 (September-November)
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