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Real Exchange Rate Changes and Trade Balance in Pakistan: A Revisit

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  • Shahbaz, Muhammad
  • Jalil, Abdul
  • Islam, Faridul

Abstract

This study uses quarterly data from 1980.1 to 2006.4 to explore the relationship between changes in real exchange rate and the trade balance indicators of Pakistan. Applying Auto Regressive Distributed Lag (ARDL) approach to cointegration we examine the existence of a possible long run relationship. We find the following: (a) a long run relationship between the series exists; and b) the coefficient of elasticity is negative and statistically significant which does not support for the J-relation. Given this, the policymakers should take conservative approach in using currency devaluation to cure the fundamental disequilibrium in the balance of payments. It is likely that such policy may not produce the desired outcome—i.e., the trade balance may not improve.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 27631.

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Date of creation: 20 Dec 2010
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Handle: RePEc:pra:mprapa:27631

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Keywords: Real Exchange Rate Changes; Trade Balance;

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References

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  1. Tihomir Stucka, 2004. "The Effects of Exchange Rate Change on the Trade Balance in Croatia," IMF Working Papers 04/65, International Monetary Fund.
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  3. Swarnjit Arora & Mohsen Bahmani-Oskooee & Gour Goswami, 2003. "Bilateral J-curve between India and her trading partners," Applied Economics, Taylor & Francis Journals, vol. 35(9), pages 1037-1041.
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Cited by:
  1. Tiwari, Aviral & Shahbaz, Muhammad, 2011. "India's trade with USA and her trade balance: An empirical analysis," MPRA Paper 29023, University Library of Munich, Germany.

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