Long-Run And Short-Run Dynamics Of Foreign Exchange Reserves Flows And Domestic Credit In Pakistan
This study formulates and examines the monetary approach to the balance of payments by incorporating the currency substitution version of money demand function for Pakistan over the period 1962-2005 using FM-OLS and Johansen-Juselius cointegration techniques. The results suggest that real output, real exchange rate and domestic credit play an important role in the determination of foreign exchange reserves in Pakistan in long-as well in short-run. Moreover, the monetary authorities sterilize foreign exchange reserves by 12% in long-run and 66% in short-run. The results support the evidence of long-run causality running from reserves to domestic credit. One important policy implication from the empirical analysis is that the validity of the monetary approach to the balance of payments and the effectiveness of monetary policy depend on the nature of the money demand function. As the specification of money demand has changes the evidence based on monetary approach has also changes.
Volume (Year): 5 (2008)
Issue (Month): 1 ()
|Contact details of provider:|| Web page: http://www.usc.es/economet/eaa.htm|
|Order Information:|| Web: http://www.usc.es/economet/info.htm Email: |
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Peter C. B. Phillips & Bruce E. Hansen, 1990. "Statistical Inference in Instrumental Variables Regression with I(1) Processes," Review of Economic Studies, Oxford University Press, vol. 57(1), pages 99-125.
- Johnson, Harry G, 1977. "The Monetary Approach to Balance of Payments Theory and Policy: Explanation and Policy Implications," Economica, London School of Economics and Political Science, vol. 44(175), pages 217-29, August.
- Granger, C. W. J. & Newbold, P., 1974. "Spurious regressions in econometrics," Journal of Econometrics, Elsevier, vol. 2(2), pages 111-120, July.
- Muhammad Arshad Khan & Muhammad Zabir Sajjid, 2005.
"The Exchange Rates and Monetary Dynamics in Pakistan: An Autoregressive Distributed Lag (ARDL) Approach,"
Lahore Journal of Economics,
Department of Economics, The Lahore School of Economics, vol. 10(2), pages 87-99, Jul-Dec.
- Khan, Muhammad Arshad & Sajjid, Muhammad Zabir, 2005. "The Exchange Rates and Monetary Dynamics in Pakistan: An Autoregressive Distributed Lag (ARDL) Apporach," MPRA Paper 6752, University Library of Munich, Germany.
- Arango, Sebastian & Ishaq Nadiri, M., 1981. "Demand for money in open economies," Journal of Monetary Economics, Elsevier, vol. 7(1), pages 69-83.
- Craig S. Hakkio & Mark Rush, 1990.
"Cointegration: how short is the long run?,"
Research Working Paper
90-08, Federal Reserve Bank of Kansas City.
- Bahmani-Oskooee, Mohsen & Techaratanachai, Ampa, 2001. "Currency substitution in Thailand," Journal of Policy Modeling, Elsevier, vol. 23(2), pages 141-145, February.
- Mohammad Ahmed, 1992. "Pakistan's Exchange Rate Policy: An Econometric Investigation," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 31(1), pages 49-74.
- Connolly, Michael & Taylor, Dean, 1976. "Testing the Monetary Approach to Devaluation in Developing Countries," Journal of Political Economy, University of Chicago Press, vol. 84(4), pages 849-59, August.
- Peter C.B. Phillips, 1988.
"Optimal Inference in Cointegrated Systems,"
Cowles Foundation Discussion Papers
866R, Cowles Foundation for Research in Economics, Yale University, revised Aug 1989.
- Wilford, D Sykes & Wilford, Walton T, 1978. "On the Monetary Approach to the Balance of Payments: The Small, Open Economy," Journal of Finance, American Finance Association, vol. 33(1), pages 319-23, March.
- Edward Tower, 1975. "Money demand and the terms of trade," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 111(4), pages 623-633, December.
- G. Booth & Mustafa Chowdhory, 1992. "Canadian foreign exchange policies: Intervention, control, cointegration," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 128(1), pages 21-33, March.
- Banerjee, Anindya, et al, 1986. "Exploring Equilibrium Relationships in Econometrics through Static Models: Some Monte Carlo Evidence," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 48(3), pages 253-77, August.
- Alawode , Abayomi A., 1997. "Some Criticisms of the Monetary Approach to the Balance of Payments," Economia Internazionale / International Economics, Camera di Commercio di Genova, vol. 50(1), pages 13-25.
- Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
- Hargreaves, Colin P. (ed.), 1994. "Non-Stationary Time Series Analysis and Cointegration," OUP Catalogue, Oxford University Press, number 9780198773924, May.
- Currie, D A, 1976. "Some Criticisms of the Monetary Analysis of Balance of Payments Correction," Economic Journal, Royal Economic Society, vol. 86(343), pages 508-22, September.
When requesting a correction, please mention this item's handle: RePEc:eaa:ijaeqs:v:5:y2008:i:1_5. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (M. Carmen Guisan)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.