Is devaluation contractionary? empirical evidence for Pakistan
The paper investigates the effect of real devaluation on economic growth. In the empirical model we also include other theoretically justified variables in the case of Pakistan, such as foreign remittances, money supply, and government spending. The paper implements the ADF method to test check the stationarity of the series; and the ARDL bounds testing approach to cointegration to establish a long run relationship. The findings affirm cointegration among the series. Real devaluation exerts contractionary effect on economic growth. The results from variance decomposition and impulse response-function show unidirectional causality from foreign remittances to economic growth; and bidirectional causality between money supply and foreign remittances. Furthermore, money supply Granger causes government spending; while devaluation Granger causes economic growth, albeit, weakly. 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.
|Date of creation:||27 Jul 2011|
|Date of revision:||01 Aug 2011|
|Contact details of provider:|| Postal: |
Web page: http://mpra.ub.uni-muenchen.de
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Haug, Alfred A, 2002. " Temporal Aggregation and the Power of Cointegration Tests: A Monte Carlo Study," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 64(4), pages 399-412, September.
- Xavier Sala-i-Martin, 1995.
"Transfers, social safety nets and economic growth,"
Economics Working Papers
139, Department of Economics and Business, Universitat Pompeu Fabra.
- Xavier Sala-I-Martin, 1997. "Transfers, Social Safety Nets, and Economic Growth," IMF Staff Papers, Palgrave Macmillan, vol. 44(1), pages 81-102, March.
- Abigail Barr, 1995.
"The missing factor: entrepreneurial networks, enterprises and economic growth in Ghana,"
Economics Series Working Papers
WPS/1995-11, University of Oxford, Department of Economics.
- Abigail Barr, 1995. "The missing factor: entrepreneurial networks, enterprises and economic growth in Ghana," CSAE Working Paper Series 1995-11, Centre for the Study of African Economies, University of Oxford.
- Frankel, Jeffrey, 2005.
"Contractionary Currency Crashes In Developing Countries,"
Working Paper Series
rwp05-017, Harvard University, John F. Kennedy School of Government.
- Jeffrey A. Frankel, 2005. "Contractionary Currency Crashes in Developing Countries," NBER Working Papers 11508, National Bureau of Economic Research, Inc.
- Ramkishen S. Rajan & Chung-Hua Shen, 2002. "Are crisis-induced devaluations contractionary?," Pacific Basin Working Paper Series 2002-06, Federal Reserve Bank of San Francisco.
- Alexander W. Hoffmaister & Carlos A. VÃ©gh, 1996.
"Disinflation and The Recession-Now-versus-Recession-Later Hypothesis: Evidence from Uruguay,"
IMF Staff Papers,
Palgrave Macmillan, vol. 43(2), pages 355-394, June.
- Carlos A. VÃ©gh Gramont & Alexander W. Hoffmaister, 1995. "Disinflation and the Recession-Now-Versus-Recession-Later Hypothesis; Evidence From Uruguay," IMF Working Papers 95/99, International Monetary Fund.
- Yemane Wolde-Rufael, 2009. "The Defence Spending-External Debt Nexus In Ethiopia," Defence and Peace Economics, Taylor & Francis Journals, vol. 20(5), pages 423-436, October.
- Robert J. Barro, 2013.
"Inflation and Economic Growth,"
Annals of Economics and Finance,
Society for AEF, vol. 14(1), pages 121-144, May.
- Markku Lanne & Helmut Lutkepohl & Pentti Saikkonen, 2003.
"Test Procedures for Unit Roots in Time Series with Level Shifts at Unknown Time,"
Oxford Bulletin of Economics and Statistics,
Department of Economics, University of Oxford, vol. 65(1), pages 91-115, February.
- Lanne, Markku & Lütkepohl, Helmut & Saikkonen, Pentti, 2001. "Test procedures for unit roots in time series with level shifts at unknown time," SFB 373 Discussion Papers 2001,39, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
- Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November.
- Artatrana Ratha, 2010. "Does Devaluation work for India?," Economics Bulletin, AccessEcon, vol. 30(1), pages 247-264.
- Mohsen Bahmani-Oskooee & Magda Kandil, 2010.
"Exchange Rate Fluctuations and Output in Oil-Producing Countries: The Case of Iran,"
Emerging Markets Finance and Trade,
M.E. Sharpe, Inc., vol. 46(3), pages 23-45, May.
- Magda E. Kandil & Mohsen Bahmani-Oskooee, 2007. "Exchange Rate Fluctuations and Output in Oil-Producing Countries; The Case of Iran," IMF Working Papers 07/113, International Monetary Fund.
- Kamin, Steve B. & Rogers, John H., 2000.
"Output and the real exchange rate in developing countries: an application to Mexico,"
Journal of Development Economics,
Elsevier, vol. 61(1), pages 85-109, February.
- Steven B. Kamin & John H. Rogers, 1997. "Output and the real exchange rate in developing countries: an application to Mexico," International Finance Discussion Papers 580, Board of Governors of the Federal Reserve System (U.S.).
- Muhammad Shahbaz, 2010. "Income inequality-economic growth and non-linearity: a case of Pakistan," International Journal of Social Economics, Emerald Group Publishing, vol. 37(8), pages 613-636, July.
- Edward, Sebastian, 1986.
"Are Devaluations Contractionary?,"
The Review of Economics and Statistics,
MIT Press, vol. 68(3), pages 501-08, August.
- Mohsen Bahmani-Oskooee & Magda Kandil, 2009. "Are devaluations contractionary in MENA countries?," Applied Economics, Taylor & Francis Journals, vol. 41(2), pages 139-150.
- Krugman, Paul & Taylor, Lance, 1978.
"Contractionary effects of devaluation,"
Journal of International Economics,
Elsevier, vol. 8(3), pages 445-456, August.
- N. Gregory Mankiw & David Romer & David N. Weil, 1990.
"A Contribution to the Empirics of Economic Growth,"
NBER Working Papers
3541, National Bureau of Economic Research, Inc.
- Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
- P Mejía-Reyes & D R Osborn & M Sensier, 2004.
"Modelling Real Exchange Rate Effects on Output Performance in Latin America,"
Centre for Growth and Business Cycle Research Discussion Paper Series
35, Economics, The Univeristy of Manchester.
- Pablo Mejia-Reyes & Denise Osborn & Marianne Sensier, 2010. "Modelling real exchange rate effects on output performance in Latin America," Applied Economics, Taylor & Francis Journals, vol. 42(19), pages 2491-2503.
- Dimitris Christopoulos, 2004. "Currency devaluation and output growth: new evidence from panel data analysis," Applied Economics Letters, Taylor & Francis Journals, vol. 11(13), pages 809-813.
- Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
- Pesaran, M. H. & Shin, Y. & Smith, R. J., 1997.
"Structural Analysis of Vector Error Correction Models with Exogenous I(1) Variables,"
Cambridge Working Papers in Economics
9706, Faculty of Economics, University of Cambridge.
- Pesaran, M. Hashem & Shin, Yongcheol & Smith, Richard J., 2000. "Structural analysis of vector error correction models with exogenous I(1) variables," Journal of Econometrics, Elsevier, vol. 97(2), pages 293-343, August.
- Ehrlich, Isaac, 1975.
"The Deterrent Effect of Capital Punishment: A Question of Life and Death,"
American Economic Review,
American Economic Association, vol. 65(3), pages 397-417, June.
- Isaac Ehrlich, 1973. "The Deterrent Effect of Capital Punishment: A Question of Life and Death," NBER Working Papers 0018, National Bureau of Economic Research, Inc.
- Paresh Kumar Narayan, 2005. "The saving and investment nexus for China: evidence from cointegration tests," Applied Economics, Taylor & Francis Journals, vol. 37(17), pages 1979-1990.
- Barro, Robert J, 1991.
"Economic Growth in a Cross Section of Countries,"
The Quarterly Journal of Economics,
MIT Press, vol. 106(2), pages 407-43, May.
- Robert J. Barro, 1989. "Economic Growth in a Cross Section of Countries," NBER Working Papers 3120, National Bureau of Economic Research, Inc.
- Barro, R.J., 1989. "Economic Growth In A Cross Section Of Countries," RCER Working Papers 201, University of Rochester - Center for Economic Research (RCER).
- Adam Przeworski & Fernando Limongi, 1993. "Political Regimes and Economic Growth," Journal of Economic Perspectives, American Economic Association, vol. 7(3), pages 51-69, Summer.
- Artatrana Ratha & Eungmin Kang & Mary Edwards, 2008. "Does an Undervalued Currency Promote Growth? Evidence from China," Working Papers 2008-2 Classification- F3, Saint Cloud State University, Department of Economics.
- M Bahmani-Oskooee & I Miteza, 2003. "Are Devaluations Expansionary or Contractionary? A survey article," Economic Issues Journal Articles, Economic Issues, vol. 8(2), pages 1-28, September.
- Martin, Philippe & Rogers, Carol Ann, 1997.
"Stabilization Policy, Learning-by-Doing, and Economic Growth,"
Oxford Economic Papers,
Oxford University Press, vol. 49(2), pages 152-66, April.
- Martin, Philippe & Rogers, Carol Ann, 1995. "Stabilization Policy, Learning by Doing, and Economic Growth," CEPR Discussion Papers 1130, C.E.P.R. Discussion Papers.
- repec:ebl:ecbull:v:30:y:2010:i:1:p:247-264 is not listed on IDEAS
- VJeffrey A. Frankel, 2005. "Mundell-Fleming Lecture: Contractionary Currency Crashes in Developing Countries," IMF Staff Papers, Palgrave Macmillan, vol. 52(2), pages 149-192, September.
- Rajan, Ramkishen S. & Shen, Chung-Hua, 2006. "Why Are Crisis-Induced Devaluations Contractionary? Exploring Alternative Hypotheses," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 21, pages 526-550.
- Paresh Kumar Narayan & Seema Narayan, 2007. "Is devaluation expansionary or contractionary? Empirical evidence from Fiji," Applied Economics, Taylor & Francis Journals, vol. 39(20), pages 2589-2598.
- MITEZA, Ilir, 2006. "Devaluation And Output In Five Transition Economies: A Panel Cointegration Approach Of Poland, Hungary, Czech Republic, Slovakia And Romania, 1993-2000," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 6(1).
- Muhammad SHAHBAZ & Rana Ejaz Ali KHAN, 2010. "Old Wine in New Bottles: Saving – Growth Nexus: Innovative Accounting Technique in Pakistan," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 7(7(548)), pages 49-60, July.
- Robert Mundell, 1963. "Inflation and Real Interest," Journal of Political Economy, University of Chicago Press, vol. 71, pages 280.
- Kim, Yoonbai & Ying, Yung-Hsiang, 2007. "An empirical assessment of currency devaluation in East Asian countries," Journal of International Money and Finance, Elsevier, vol. 26(2), pages 265-283, March.
- Halicioglu, Ferda, 2007.
"The Bilateral J-curve: Turkey versus her 13 Trading Partners,"
3564, University Library of Munich, Germany.
- Halicioglu, Ferda, 2008. "The bilateral J-curve: Turkey versus her 13 trading partners," Journal of Asian Economics, Elsevier, vol. 19(3), pages 236-243, June.
- Ehrlich, Isaac, 1977. "The Deterrent Effect of Capital Punishment: Reply," American Economic Review, American Economic Association, vol. 67(3), pages 452-58, June.
- repec:lje:journl:v:1:y:2007:i:1:p:49-77 is not listed on IDEAS
- Thorvaldur Gylfason & Michael Schmid, 1983. "Does Devaluation Cause Stagflation?," Canadian Journal of Economics, Canadian Economics Association, vol. 16(4), pages 641-54, November.
- Abu Wahid & Muhammad Shahbaz, 2009. "Does Nominal Devaluation Precede Real Devaluation? The Case of The Philippines," Transition Studies Review, Springer, vol. 16(1), pages 47-61, May.
- J. Saul Lizondo & Peter J. Montiel, 1989. "Contractionary Devaluation in Developing Countries: An Analytical Overview," IMF Staff Papers, Palgrave Macmillan, vol. 36(1), pages 182-227, March.
- Munir A. S. Choudhary & Muhammad Aslam Chaudhry, 2007. "Effects of the Exchange Rate on Output and Price Level: Evidence from the Pakistani Economy," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 12(1), pages 49-77, Jan-Jun.
- Muhammad Shahbaz & Rehmat Ullah Awan & Khalil Ahmad, 2011. "The exchange value of the Pakistan rupee & Pakistan trade balance:an ARDL bounds testing approach," Journal of Developing Areas, Tennessee State University, College of Business, vol. 44(2), pages 68-93, January-M.
- M. Hashem Pesaran & Yongcheol Shin & Richard J. Smith, 2001. "Bounds testing approaches to the analysis of level relationships," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(3), pages 289-326.
- Stephen K. Layson, 1983. "Homicide and Deterrence: Another View of the Canadian Time-Series Evidence," Canadian Journal of Economics, Canadian Economics Association, vol. 16(1), pages 52-73, February.
- Stephen Leybourne & Tae-Hwan Kim & Vanessa Smith & Paul Newbold, 2003. "Tests for a change in persistence against the null of difference-stationarity," Econometrics Journal, Royal Economic Society, vol. 6(2), pages 291-311, December.
- Muhammad SHAHBAZ, 2009. "On Nominal and Real Devaluations Relation: An Econometric Evidence for Pakistan," International Journal of Applied Econometrics and Quantitative Studies, Euro-American Association of Economic Development, vol. 9(1).
- Johansen, Soren, 1992. "Cointegration in partial systems and the efficiency of single-equation analysis," Journal of Econometrics, Elsevier, vol. 52(3), pages 389-402, June.
When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:32520. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ekkehart Schlicht)
If references are entirely missing, you can add them using this form.