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The Harberger-Laursen-Metzler Effect: Evidence from Pakistan

  • Tayyaba Idrees


    (MPhil Student, Department of Economics, Fatima Jinnah Women University, Pakistan.)

  • Saira Tufail


    (Lecturer in Economics, Department of Economics, Fatima Jinnah Women University, Pakistan.)

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    According to the Harberger-Laursen-Metzler (HLM) effect, an exogenous temporary increase in the terms of trade leads to an improvement in the current account balance. This paper uses a recursive vector autoregression to investigate empirically the existence of the HLM effect in Pakistan, using a time series dataset for the period 1980–2009. Two important results emerge. First, real income deteriorates with an improvement in the terms of trade. Second, the current account balance also responds negatively to innovations in the terms of trade, which implies that the HLM effect does not exist in Pakistan.

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    Article provided by Department of Economics, The Lahore School of Economics in its journal Lahore Journal of Economics.

    Volume (Year): 17 (2012)
    Issue (Month): 2 (July-Dec)
    Pages: 87-110

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    Handle: RePEc:lje:journl:v:17:y:2012:i:2:p:87-110
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    7. Paul Cashin & C. John McCDermott, 2002. "The Long-Run Behavior of Commodity Prices: Small Trends and Big Variability," IMF Staff Papers, Palgrave Macmillan, vol. 49(2), pages 2.
    8. Fry, Maxwell J., 1986. "Terms-of-trade dynamics in Asia: An analysis of national saving and domestic investment responses to terms-of-trade changes in 14 Asian LDCs," Journal of International Money and Finance, Elsevier, vol. 5(1), pages 57-73, March.
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    15. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
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    17. Khan, Ashfaque Hasan & Hasan, Lubna & Malik, Afia, 1992. "Dependency Ratio, Foreign Capital Inflows and the Rate of Savings in Pakistan," MPRA Paper 7348, University Library of Munich, Germany.
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    20. Bouakez, Hafedh & Kano, Takashi, 2008. "Terms of trade and current account fluctuations: The Harberger-Laursen-Metzler effect revisited," Journal of Macroeconomics, Elsevier, vol. 30(1), pages 260-281, March.
    21. Pinto, Brian, 1987. "Nigeria during and after the Oil Boom: A Policy Comparison with Indonesia," World Bank Economic Review, World Bank Group, vol. 1(3), pages 419-45, May.
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