Is devaluation contractionary? Empirical evidence for Pakistan
The paper examines the effect of real devaluation on economic growth. In the empirical model we include few other theoretically justified variables e.g., money supply, foreign remittances, and government spending as they appear relevant for Pakistan. The ADF unit root test is used for stationarity of the series. Also, to capture possible structural breaks due to currency regimes shifts, the Saikkonen and Lütkepohl unit root test is used. We apply the ARDL bounds testing approach to cointegration to explore a long run relation among the series; and the variance decomposition method and impulse response function for the direction of causality. The findings affirm cointegrating relation among the series. Real devaluation exerts contractionary effect on economic growth. 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. Copyright Springer Science+Business Media, LLC. 2012
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