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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.

Suggested Citation

  • Shahbaz, Muhammad & Jalil, Abdul & Islam, Faridul, 2010. "Real Exchange Rate Changes and Trade Balance in Pakistan: A Revisit," MPRA Paper 27631, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:27631
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    References listed on IDEAS

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    3. Zeeshan Khan & Asghar Ali & Shahid Ali, 2016. "Impact of Devaluation on Balance of Trade: A Case Study of Pakistan Economy," Asian Journal of Economic Modelling, Asian Economic and Social Society, vol. 4(2), pages 90-94, June.
    4. Muhammad Farhan Ashraf & Muhammad Mehran Latif & Hina Kanwal, 2019. "Factors Inducing the Investment and Saving Behaviour in Pakistan," iRASD Journal of Economics, International Research Alliance for Sustainable Development (iRASD), vol. 1(2), pages 82-88, December.
    5. SOLOMON PRINCE Nathaniel, 2020. "Does Exchange Rate Have Asymmetric Impact On Trade Balance? Fresh Insights From Combined Cointegration," Studies in Business and Economics, Lucian Blaga University of Sibiu, Faculty of Economic Sciences, vol. 15(1), pages 259-269, April.
    6. Gulzar Ali & Ghulam Mustafa & Said Zamin Shah, 2020. "Performance of Agriculture Sector in Foreign Trade of Pakistan," Global Economics Review, Humanity Only, vol. 5(1), pages 12-23, March.

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    More about this item

    Keywords

    Real Exchange Rate Changes; Trade Balance;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • P45 - Political Economy and Comparative Economic Systems - - Other Economic Systems - - - International Linkages

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