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Is devaluation contractionary? Empirical evidence for Pakistan

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  • Muhammad Shahbaz

    ()

  • Faridul Islam
  • Naveed Aamir

Abstract

The paper examines the effect of real devaluation on economic growth. In the empirical model we include few other theoretically justified variables e.g., money supply, foreign remittances, and government spending as they appear relevant for Pakistan. The ADF unit root test is used for stationarity of the series. Also, to capture possible structural breaks due to currency regimes shifts, the Saikkonen and Lütkepohl unit root test is used. We apply the ARDL bounds testing approach to cointegration to explore a long run relation among the series; and the variance decomposition method and impulse response function for the direction of causality. The findings affirm cointegrating relation among the series. Real devaluation exerts contractionary effect on economic growth. The results should help in formulating a comprehensive trade policy including the use of competitive devaluation as a tool to correct balance of payments problems. Copyright Springer Science+Business Media, LLC. 2012

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Bibliographic Info

Article provided by Springer in its journal Economic Change and Restructuring.

Volume (Year): 45 (2012)
Issue (Month): 4 (November)
Pages: 299-316

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Handle: RePEc:kap:ecopln:v:45:y:2012:i:4:p:299-316

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Web page: http://www.springerlink.com/link.asp?id=113294

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Keywords: Devaluation; Contractionary; Cointegration;

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References

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Citations

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Cited by:
  1. 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.
  2. Kyophilavong, Phouphet & Shahbaz, Muhammad & Uddin, Gazi Salah, 2013. "Does J-curve phenomenon exist in case of Laos? An ARDL approach," Economic Modelling, Elsevier, vol. 35(C), pages 833-839.
  3. Wasim Qazi & Syed Raza & Syed Jawaid, 2014. "Higher education and growth performance of Pakistan: evidence from multivariate framework," Quality & Quantity: International Journal of Methodology, Springer, vol. 48(3), pages 1651-1665, May.
  4. Raza, Syed Ali & Jawaid, Syed Tehseen & Afshan, Sahar, 2013. "Is Stock Market Sensitive to Foreign Capital Inflows and Economic Growth? Evidence from Pakistan," MPRA Paper 48399, University Library of Munich, Germany.
  5. Muhammad Shahbaz & Ijaz Rehman & Nurul Mahdzan, 2014. "Linkages between income inequality, international remittances and economic growth in Pakistan," Quality & Quantity: International Journal of Methodology, Springer, vol. 48(3), pages 1511-1535, May.
  6. Jawaid, Syed Tehseen & Raza, Syed Ali, 2013. "Effects of terms of trade on growth performance of India," Economic Modelling, Elsevier, vol. 33(C), pages 940-946.
  7. Shahbaz, Muhammad, 2013. "Linkages between inflation, economic growth and terrorism in Pakistan," Economic Modelling, Elsevier, vol. 32(C), pages 496-506.
  8. Raza, Syed Ali & Jawaid, Syed Tehseen, 2013. "Terrorism and tourism: A conjunction and ramification in Pakistan," Economic Modelling, Elsevier, vol. 33(C), pages 65-70.
  9. Muhammad, Shahbaz & Faridul, Islam & Muhammad Sabihuddin, Butt, 2011. "Devaluation and income inequality: Evidence from Pakistan," MPRA Paper 35522, University Library of Munich, Germany, revised 21 Dec 2011.
  10. Muhammad, Shahbaz & Ilhan, Ozturk, 2012. "Electricity consumption and economic growth causality revisited: evidence from Turkey," MPRA Paper 37637, University Library of Munich, Germany, revised 20 Mar 2012.

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