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Is devaluation contractionary? Empirical evidence for Pakistan

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  • Muhammad Shahbaz

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  • Faridul Islam
  • Naveed Aamir

Abstract

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

Suggested Citation

  • Muhammad Shahbaz & Faridul Islam & Naveed Aamir, 2012. "Is devaluation contractionary? Empirical evidence for Pakistan," Economic Change and Restructuring, Springer, vol. 45(4), pages 299-316, November.
  • Handle: RePEc:kap:ecopln:v:45:y:2012:i:4:p:299-316
    DOI: 10.1007/s10644-011-9119-7
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    Cited by:

    1. Muhammad Shahbaz & Ilhan Ozturk & Amjad Ali, 2015. "Electricity Consumption and Economic Growth Causality Revisited: Evidence from Turkey," Bulletin of Energy Economics (BEE), The Economics and Social Development Organization (TESDO), vol. 3(4), pages 176-193, December.
    2. 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.
    3. Syed Ali Raza & Syed Tehseen Jawaid & Sahar Afshan & Mohd Zaini Abd Karim, 2015. "Is stock market sensitive to foreign capital inflows and economic growth?: Evidence from Pakistan," Journal of Chinese Economic and Foreign Trade Studies, Emerald Group Publishing, vol. 8(3), pages 142-164, October.
    4. An, Lian & Kim, Gil & Ren, Xiaomei, 2014. "Is devaluation expansionary or contractionary: Evidence based on vector autoregression with sign restrictions," Journal of Asian Economics, Elsevier, vol. 34(C), pages 27-41.
    5. Muhammad Shahbaz & Aviral Kumar Tiwari & Mohammad Iqbal Tahir, 2015. "Analyzing time-frequency relationship between oil price and exchange rate in Pakistan through wavelets," Journal of Applied Statistics, Taylor & Francis Journals, vol. 42(4), pages 690-704, April.
    6. repec:kap:ecopln:v:51:y:2018:i:1:d:10.1007_s10644-016-9198-6 is not listed on IDEAS
    7. repec:mes:emfitr:v:54:y:2018:i:6:p:1442-1459 is not listed on IDEAS
    8. Amjad Ali & Nooreen Mujahid & Yahya Rashid & Muhammad Shahbaz, 2015. "Human Capital Outflow and Economic Misery: Fresh Evidence for Pakistan," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 124(3), pages 747-764, December.
    9. repec:kap:ecopln:v:51:y:2018:i:2:d:10.1007_s10644-017-9201-x is not listed on IDEAS
    10. Tang, Chor Foon & Aviral Kumar, Tiwari & Shahbaz, Muhammad, 2016. "Dynamic Inter-relationships among tourism, economic growth and energy consumption in India," MPRA Paper 69848, University Library of Munich, Germany, revised 04 Mar 2016.
    11. Nooreen Mujahid & Aniqa Zeb, 2014. "Impact of Devaluation on GDP of Pakistan," International Journal of Economics and Empirical Research (IJEER), The Economics and Social Development Organization (TESDO), vol. 2(8), pages 345-349, August.
    12. 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, vol. 48(3), pages 1511-1535, May.
    13. Kyophilavong, Phouphet & Shahbaz, Muhammad & Uddin, Gazi Salah, 2013. "Does J-curve phenomenon exist in case of Laos? An ARDL approach," Economic Modelling, Elsevier, vol. 35(C), pages 833-839.
    14. Gil Kim & Lian An & Yoonbai Kim, 2015. "Exchange Rate, Capital Flow and Output: Developed versus Developing Economies," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 43(2), pages 195-207, June.
    15. 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, vol. 48(3), pages 1651-1665, May.
    16. 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), vol. 1(4), pages 48-58, April.
    17. Shahbaz, Muhammad, 2013. "Linkages between inflation, economic growth and terrorism in Pakistan," Economic Modelling, Elsevier, vol. 32(C), pages 496-506.
    18. Raza, Syed Ali & Jawaid, Syed Tehseen, 2013. "Terrorism and tourism: A conjunction and ramification in Pakistan," Economic Modelling, Elsevier, vol. 33(C), pages 65-70.
    19. Kumar, Ronald/R, 2011. "Role of Trade, Aid, Remittances and Financial Development in Pakistan," MPRA Paper 38871, University Library of Munich, Germany.
    20. Mohsen Bahmani-Oskooee & Nazif Durmaz, 2016. "Exchange rate volatility and Turkish commodity trade with the rest of the world," Economic Change and Restructuring, Springer, vol. 49(1), pages 1-21, February.
    21. Jawaid, Syed Tehseen & Raza, Syed Ali, 2013. "Effects of terms of trade on growth performance of India," Economic Modelling, Elsevier, vol. 33(C), pages 940-946.

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    Keywords

    Devaluation; Contractionary; Cointegration;

    JEL classification:

    • F3 - International Economics - - International Finance

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