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Macroeconomic Impacts of Monetary Variables on Pakistan’s Foreign Sector

Author

Listed:
  • M. Aslam Chaudhary

    (University of the Punjab, Lahore, Pakistan.)

  • Ghulam Shabbir

    (Government College, Bhera, Pakistan.)

Abstract

This study examines the impact of monetary variables on the balance of payments of Pakistan. Besides, exogoneity of monetary variables is also tested. The empirical findings of the study show that balance of payments is a monetary phenomenon and monetary policy could be useful in improving the foreign sector. The studies so far have not confirmed this effect. The study also shows that an increase in price level and real income lead foreign reserves to inflow. However, an increase in the interest rate, money multiplier and domestic credit lead international reserves to outflow. Partial sterilisation was evident in the short run. But in the long run, it tends to be equal to minus one, indicating no sterilisation effect on the foreign reserve movements. The central implication derived from the study is that an increasing government budget deficit leads to excessive expansion in domestic credit creation and as a result a loss of foreign reserves. The null hypothesis for exogoneity of price level, real income, interest rate and inflation rate to foreign reserves is accepted. However, the null hypothesis for the exogoneity of domestic credit is rejected for the general model but accepted for the linear model. It appears that monetary policy is effective in Pakistan.

Suggested Citation

  • M. Aslam Chaudhary & Ghulam Shabbir, 2004. "Macroeconomic Impacts of Monetary Variables on Pakistan’s Foreign Sector," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 9(1), pages 62-84, Jan-June.
    • Handle: RePEc:lje:journl:v:9:y:2004:i:1:p:62-84
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    References listed on IDEAS

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    5. Mohsin S. Khan, 1974. "Experiments with a Monetary Model for the Venezuelan Economy (Expériences menées à partir d'un modèle monétaire construit pour l'économie vénézuélienne) (Experimentos con un modelo monetario p," IMF Staff Papers, Palgrave Macmillan, vol. 21(2), pages 389-413, July.
    6. Johannes, James M, 1981. "Testing the Exogeneity Specification Underlying the Monetary Approach to the Balance of Payments," The Review of Economics and Statistics, MIT Press, vol. 63(1), pages 29-34, February.
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    Cited by:

    1. Khan, Abdul Qayyum Khan & Khattak, Naeem U Rehman Khattak & Hussain, Anwar Hussain & Jehanzeb, Jehanzeb, 2008. "Crowding-in Effect of Budget Deficit: Evidence from Pakistan (1960-2005)," MPRA Paper 42010, University Library of Munich, Germany.
    2. Amber Fatima & Abdul Waheed, 2014. "Economic uncertainty and growth performance: a macroeconomic modeling analysis for Pakistan," Quality & Quantity: International Journal of Methodology, Springer, vol. 48(3), pages 1361-1387, May.
    3. Ayesha Mushtaq & Khalid Zaman, 2013. "Macroeconomic Factors Affecting Budget Deficit in Pakistan: A Time Series Analysis," Oeconomics of Knowledge, Saphira Publishing House, vol. 5(4), pages 17-33, October.
    4. Ibrahim, Taofik, 2017. "Budget deficit-money demand nexus in Nigeria: A myth or reality?," MPRA Paper 86265, University Library of Munich, Germany, revised 09 Nov 2017.

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