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Is devaluation contractionary? empirical evidence for Pakistan

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  • Muhammad, Shahbaz
  • Faridul, Islam
  • Naveed, Aamir

Abstract

The paper investigates the effect of real devaluation on economic growth. In the empirical model we also include other theoretically justified variables in the case of Pakistan, such as foreign remittances, money supply, and government spending. The paper implements the ADF method to test check the stationarity of the series; and the ARDL bounds testing approach to cointegration to establish a long run relationship. The findings affirm cointegration among the series. Real devaluation exerts contractionary effect on economic growth. The results from variance decomposition and impulse response-function show unidirectional causality from foreign remittances to economic growth; and bidirectional causality between money supply and foreign remittances. Furthermore, money supply Granger causes government spending; while devaluation Granger causes economic growth, albeit, weakly. 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.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 32520.

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Date of creation: 27 Jul 2011
Date of revision: 01 Aug 2011
Handle: RePEc:pra:mprapa:32520

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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. 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.
  2. 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.
  3. 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.
  4. 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, Springer, vol. 48(3), pages 1511-1535, May.
  5. Shahbaz, Muhammad, 2013. "Linkages between inflation, economic growth and terrorism in Pakistan," Economic Modelling, Elsevier, Elsevier, vol. 32(C), pages 496-506.
  6. Kyophilavong, Phouphet & Shahbaz, Muhammad & Uddin, Gazi Salah, 2013. "Does J-curve phenomenon exist in case of Laos? An ARDL approach," Economic Modelling, Elsevier, Elsevier, vol. 35(C), pages 833-839.
  7. 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, Springer, vol. 48(3), pages 1651-1665, May.
  8. 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.
  9. Jawaid, Syed Tehseen & Raza, Syed Ali, 2013. "Effects of terms of trade on growth performance of India," Economic Modelling, Elsevier, Elsevier, vol. 33(C), pages 940-946.
  10. Muhammad Shahbaz & Faridul Islam & Muhammad Sabihuddin Butt, 2013. "Devaluation and Income Inequality Nexus: Evidence from Pakistan," International Journal of Economics and Empirical Research (IJEER), The Economics and Social Development Organization (TESDO), The Economics and Social Development Organization (TESDO), vol. 1(4), pages 48-58, April.
  11. Raza, Syed Ali & Jawaid, Syed Tehseen, 2013. "Terrorism and tourism: A conjunction and ramification in Pakistan," Economic Modelling, Elsevier, Elsevier, vol. 33(C), pages 65-70.

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