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The Impact of Trade Liberalization on Demand and Price Volatility in Pakistan: Co Integration Approach for Compensation Hypothesis

Author

Listed:
  • Hira Mujahid

    (M. Phil student at Applied Economics Research Center, University of Karachi, Karachi-75279)

  • Shaista Alam

    (Assistant Professor/ Research Economist at Applied Economics Research Center, University of Karachi, Karachi-75279)

Abstract

The important modification of the compensation hypothesis rests on the principle; increased trade openness increase the domestic economic volatility. The economic theory recommend increase of international trade require integration into huge, even markets, and involve risk diversification, in fact it may support rather than reduce stability. By the same indication, however, economic theory also suggests that smaller economies should familiar with greater levels of volatility than larger economies, this study quantify the relationship proposed in case of Pakistan containing dataset since 1966-2009. The verification presented here suggests that the level of domestic economic volatility is not only because of international trade integration, there are some other factors too; however trade integration may have eased rather than emphasizing on creating domestic economic volatility.

Suggested Citation

  • Hira Mujahid & Shaista Alam, 2014. "The Impact of Trade Liberalization on Demand and Price Volatility in Pakistan: Co Integration Approach for Compensation Hypothesis," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 4(6), pages 744-754, June.
  • Handle: RePEc:asi:aeafrj:2014:p:744-754
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    References listed on IDEAS

    as
    1. Khalid Mustafa & Mohammed Nishat, 2004. "Volatility of Exchange Rate and Export Growth in Pakistan: The Structure and Interdependence in Regional Markets," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 43(4), pages 813-828.
    2. Coury, Tarek & Razin, Assaf & Sadka, Efraim, 2002. "Trade Openness and Investment Instability," CEPR Discussion Papers 3259, C.E.P.R. Discussion Papers.
    3. Julian di Giovanni & Andrei A. Levchenko, 2009. "Trade Openness and Volatility," The Review of Economics and Statistics, MIT Press, vol. 91(3), pages 558-585, August.
    4. repec:cup:apsrev:v:72:y:1978:i:04:p:1243-1261_15 is not listed on IDEAS
    5. Norman V. Loayza & Romain Rancière & Luis Servén & Jaume Ventura, 2007. "Macroeconomic Volatility and Welfare in Developing Countries: An Introduction," World Bank Economic Review, World Bank Group, vol. 21(3), pages 343-357, October.
    6. Dani Rodrik, 1998. "Why Do More Open Economies Have Bigger Governments?," Journal of Political Economy, University of Chicago Press, vol. 106(5), pages 997-1032, October.
    7. Dani Rodrik, 1997. "Trade, Social Insurance, and the Limits to Globalization," NBER Working Papers 5905, National Bureau of Economic Research, Inc.
    8. Liberati, Paolo, 2007. "Trade Openness, Capital Openness and Government Size," Journal of Public Policy, Cambridge University Press, vol. 27(02), pages 215-247, August.
    9. Mona Haddad & Jamus Jerome Lim & Cosimo Pancaro & Christian Saborowski, 2013. "Trade openness reduces growth volatility when countries are well diversified," Canadian Journal of Economics, Canadian Economics Association, vol. 46(2), pages 765-790, May.
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