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Exchange Rate and Trade: A Causality Analysis for Pakistan Economy

  • Qazi Muhammad Adnan Hye
  • Uzma Iram
  • Amra Hye

: This paper investigates the direction of causality between exchange rate and trade (exports and imports) for a developing country like Pakistan, utilizing the monthly time series data covering the period 1995-2006. Cointegration and causality tests were conducted to assess the link between trade and exchange rate. The results of Johansen-Juselius (JJ) cointegration tests indicate that there is one cointegrating vector between exchange rate, exports and imports. However, an important finding of this empirical research is that there is a strong and stable relationship between exports and imports, and the causality is bidirectional. This study also rejects previous findings about negative effect of exchange rate volatility on trade volume in a developing economy like Pakistan.

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Article provided by IUP Publications in its journal The IUP Journal of Applied Economics.

Volume (Year): VIII (2009)
Issue (Month): 5-6 (September-November)
Pages: 161-173

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Handle: RePEc:icf:icfjae:v:08:y:2009:i:5-6:p:161-173
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