Muhammad, Shahbaz and Faridul, Islam and Naveed, Aamir (2011): Is devaluation contractionary? empirical evidence for Pakistan.
Download (184kB) | Preview
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.
|Item Type:||MPRA Paper|
|Original Title:||Is devaluation contractionary? empirical evidence for Pakistan|
|English Title:||Is Devaluation Contractionary? Empirical Evidence for Pakistan|
|Keywords:||Devaluation, Contractionary, Cointegration|
|Subjects:||F - International Economics > F3 - International Finance|
|Depositing User:||Muhammad Shahbaz|
|Date Deposited:||01. Aug 2011 10:12|
|Last Modified:||12. Feb 2013 19:08|
Alam, R. M., (2010). Impact of devaluation of Taka on export earnings of Bangladesh: A causal analysis. World Journal of Management, 2: 36-44.
Asif, M., Shah, S. Q., Zaman, K and Rashid, K., (2011). Devaluation and output growth: Evidence from Pakistan. Mediterranean Journal of Social Sciences, 2: 394-401.
Bahmani -Oskooee. M and Kandil. M., (2007). Exchange Rate Fluctuations and Output in Oil-Producing Countries: The Case of Iran. IMF WP/07/133.
Bahmani-Oskooee M, and Miteza I (2003). Are Devaluations Expansionary or Contractionary? A Survey Article? Economic Issues 8:1–28.
Bahmani-Oskooee M, Kutan AM., (2008). The J-curve in the Emerging Economies of Eastern Europe. Applied Economics, 41: 2523-2532.
Bahmani-Oskooee. M and Kandil. M., (2009). Are Devaluations Contractionary in MENA countries? Applied Economics, 41:139-150.
Barro, R J., (1991). Economic growth in a cross-section of countries. Quarterly Journal of Economics, 106: 407-443.
Barro, R.J and Lee, J.W., (1994). Data set for a panel of 138 countries, Cambridge Mass.: NBER working Papers.
Barro, R.J and Sala-I-Martin, X., (1995). Economic growth. Cambridge MA: McGraw-Hill.
Berument, H. And Pasaogullari, M., (2003). Effects of the Real Exchange Rate on Output and Inflation: Evidence from Turkey. The Developing Economies, XLI-4: 401-35.
Bowers, W. and Pierce, G., (1975). The Illusion of Deterrence in Isaac Ehrlich’s Work on the Deterrent Effect of Capital Punishment. Yale Law Journal, 85: 187-208.
Cooper, R. N., (1971). Currency Devaluation in Developing Countries. in Government and Economic Development (Ed.) G. Ranis, Yale University Press, New Heaven, pp. 26-42.
Copelman, M. and Werner, A. M. (1996). The Monetary Transmission Mechanism in Mexico. Working Paper, Federal Reserve Board.
Diaz-Alejando, C. F., (1963). A Note on the Impact of Devaluation and Redistribution and the Redistributive Effect. Journal of Political Economy, 71: 577-580.
Dimitris, C. K., (2004). Currency Devaluation and Output Growth: New Evidence from Panel Data Analysis. Applied Economics Letters, 11: 809-813.
Edwards, S., (1986). Are Devaluations Contractionary?” Review of Economic and Statistics, 68: 501-508.
Ehrlich, I., (1975). The Deterrent Effect of Capital Punishment – A Question of Life and Death. American Economic Review, 65: 397-417.
Ehrlich, I., (1977). The Deterrent Effect of Capital Punishment Reply”, American Economic Review 67: 452-58.
Engle, R. F and Granger C. W. J., (1987). Cointegration and Error Correction Representation: Estimation and Testing. Econometrica, 55: 251-276.
Frankel, J. A., (2005). Mundell-Fleming Lecture: Contractionary Currency Crashes in Developing Countries.
Gylfason, T., and Schmid, (1983), “Does Devaluation Cause Stagflation?” Canadian Journal of Economics, 16: 641-654.
Halicioglu, F., (2008). The Bilateral J-curve: Turkey versus her 13 Trading Partners. Journal of Asian Economics, 19: 236-243.
Haug, A. (2002). Temporal Aggregation and the Power of Co-integration Tests: A Monte Carlo Study. Oxford Bulletin of Economics and Statistics, 64: 399-412.
Hoffmaister, A. W. and Carlos A. V., (1996). Disinflation and the Recession-Now-Versus- Recession-Later Hypothesis: Evidence from Uruguay. IMF Staff Papers, 43: 355-394.
Johansen, S and K, Juselius., (1990). Maximum Likelihood Estimation and Inference on Cointegration- with Applications to the Demand for Money. Oxford Bulletin of Economics and Statistics, 52(2): 169-210.
Johansen, S., (1991). Estimation and Hypothesis Testing of Co-integrating Vectors in Gaussian Vector Autoregressive Models. Econometrica, 59: 1551-180.
Johansen, S., (1992). Co-integration in Partial Systems and the Efficiency of Single-Equation Analysis. Journal of Econometrics, 52: 389-402.
Kalyoncu. H, Artan. S and Tezeciki. S., (2008). Currency Devaluation and Output Growth: Empirical Evidence from OECD Countries. International Research Journal of Finance and Economics, 14: 232-238.
Kamin, S. B. and Rogers, J. H., (2000). Output and real exchange rate in developing countries: an application to Mexico. Journal of Development Economics, 61: 85-109.
Khan, M., (1988). The Macroeconomic Effects of Fund Supported Adjustment Program: An Empirical Assessment. IMF Working Paper, WP/88/113.
Kim, Y. and Ying, Y., (2007). An Empirical Assessment of Currency Devaluation in East Asian countries. Journal of International Money and Finance, 26: 265-283.
Korhonen, I and Wachtel, P., (2006). A Note on Exchange Rate Pass-through in CIS Countries. Research in International Business and Finance, 20(2):215–226
Krugman, P. and Taylor, L. (1978). Contractionary Effects of Devaluation. Journal of International Economics, 8: 445-456.
Lenne, K., Lutkepohl, H and Saikkonen, p., (2003). Test Procedures for Unit Roots in Time Series with Level Shifts at Unknown Time, Oxford Bulletin of Economics and Statistics, 65: 91-115.
Layson, S., (1983). Homicide and Deterrence: Another View of the Canadian Time Series Evidence. Canadian Journal of Economics, 16: 52-73.
Leybourne, S., Kim, T.-H, Smith, V. and Newbold, P., (2003). Tests for a Change in Persistence Against the null of Difference Stationarity. Econometrics Journal, 6: 290-310.
Lizondo, J. S. and Monteil, P. J. (1989). Contractionary Devaluation in Developing Countries. International Monetary Fund Staff papers, 36: 182-227.
Mankiw, NG., Romer, D and Weil, N., (1992). A Contribution to the Empirics of Economic Growth. The Quarterly Journal of Economics, 107: 407-437.
Mejía-Reyesab, P., Osborna, D. R and Sensiera, M., (2010). Modeling Real Exchange Rate Effects on Output Performance in Latin America, Applied Economics, 42: 2491-2503.
Miteza, I., (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, 6(1):69-78
Moreno, R., (1999). Depreciations and Recessions in East Asia. Federal Reserve Bank of San Francisco Economic Review, 3: 27-40.
Mundell, R. (1963) “Inflation and Real Interest” Journal of Political Economy 71, pp: 280-283.
Narayan, P. K and Narayan, S., (2007). Is Devaluation Expansionary or Contractionary? Empirical Evidence from Fiji? Applied Economics, 39: 2589-2598.
Papazoglou, C. E., (1999). The Real Exchange Rate and Economic Activity: Is the Hard – Drachma Policy Necessarily Contractionary? Economic Bulletin, Bank of Greece,
Pesaran M. H., Shin Y., Smith, R. J., (2000). Structural Analysis of Vector Error Correction Models with Exogenous I(1) Variables. Journal of Econometrics, 97: 293-343.
Pesaran, M. H and Pesaran, B. (1997). Working with Microfit 4.0: Interactive Econometric Analysis. Oxford: Oxford University Press.
Pesaran, M. H. and Shin, Y., (1999). An Autoregressive Distributed Lag Modeling Approach to Co-integration Analysis. in (eds), Econometrics and Economic Theory in the 20th Century: The Ragnar Frisch Centennial Symposium, Strom S (ed.). Cambridge University Press: Cambridge.
Pesaran, M. H., Shin, Y. and Smith, R. J., (2001). Bounds Testing Approaches to the Analysis of Level Relationships. Journal of Applied Econometrics, 16: 289-326.
Przeworski, A and Limongi, F., (1993). Political regimes and economic growth. The Journal of Economic Perspectives, 7: 51-69.
Rajan, R. S and Shen, C-H., (2006). Why are Crisis-induced Devaluations Contractionary? Exploring Alternative Hypothesis. Journal of Economic Integration, 21:526–550.
Ratha, A., (2010). Does devaluation work for India? Economics Bulletin, 30: 247-264.
Ratha. A, Kang. E and M. E. Edwards., (2007). Does an Undervalued Currency Promote Growth? Evidence from China. Unpublished Manuscript.
Razzaqu, M. A., (2003). The Effect of Exchange Rate Changes on Output: An Empirical Analysis on Bangladesh. Technical Paper No-5. Bangladesh Institute of Development Studies.
Shahbaz. M and Khan, R, I., (2010). Old wine in new bottles: saving-growth nexus: innovative accounting technique in Pakistan, Theoretical and Applied Economics, 7: 49-60.
Shahbaz. M, (2008). Nominal and real devaluations nexus & two econometric approaches for Pakistan, International Journal of Economic Perspective. 2: 38-45.
Shahbaz. M, (2009). On nominal and real devaluations relation: An econometric evidence for Pakistan. International Journal of Applied Econometrics and Quantitative Studies, 19: 86-108.
Shahbaz. M, (2010). Income inequality-economic growth and non-linearity: a case of Pakistan. International Journal of Social Economics, 37 (8), pp: 613-636.
Shahbaz. M, Awan. R. U and Ahmad. K., (2011). The Exchange Value of the Pak-Rupee & Pak-Trade Balance: An ARDL Bounds Testing Approach. The Journal of Developing Areas, 44: 69-93.
Shahbaz. M, Qureshi, M. N and Aamir, N., (2007). Remittances and Financial Sector's Performance: Under two Alternative Approaches for Pakistan. International Research Journal of Finance and Economics. 12: 133-146.
Shan, J., (2005). Does financial development ‘lead’ economic growth? A vector autoregression approach. Applied Economics 37: 1353-1367.
Sheeley, C. A., (1986). Unanticipated Inflation, Devaluation, and Output in Latin America. World Development, 14: 65-71.
Shieh. Y., (2009). The Tight Money Effect of Devaluation: An Alternative Interpretation of Contractionary Devaluation. Journal of Applied Business and Economics, 4:1-7.
Wahid, A N M., and Shahbaz, M., (2009). Does Nominal Devaluation Precede Real Devaluation? The Case of The Philippines. Transition Studies Review, 16:47-61.
Wolde-Rufael, Y., (2009). The defence spending-external debt nexus in Ethiopia. Defence and Peace Economics, 20: 423-436.