Real Exchange Rate Changes and Trade Balance in Pakistan: A Revisit

Shahbaz, Muhammad and Jalil, Abdul and Islam, Faridul (2010): Real Exchange Rate Changes and Trade Balance in Pakistan: A Revisit.

Abstract

This study uses quarterly data from 1980.1 to 2006.4 to explore the relationship between changes in real exchange rate and the trade balance indicators of Pakistan. Applying Auto Regressive Distributed Lag (ARDL) approach to cointegration we examine the existence of a possible long run relationship. We find the following: (a) a long run relationship between the series exists; and b) the coefficient of elasticity is negative and statistically significant which does not support for the J-relation. Given this, the policymakers should take conservative approach in using currency devaluation to cure the fundamental disequilibrium in the balance of payments. It is likely that such policy may not produce the desired outcome—i.e., the trade balance may not improve.

• Item Type: MPRA Paper
• Language: English
• Keywords: Real Exchange Rate Changes, Trade Balance
• Subjects: C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models; P - Economic Systems > P4 - Other Economic Systems > P45 - International Trade, Finance, Investment, and Aid

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