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Testing the Marshall-Lerner Condition and the J-Curve Phenomenon for Pakistan: Some New Insights

Author

Listed:
  • Nazeef Ishtiaq

    (Forman Christian College (A Chartered University), 54000, Lahore, Pakistan.)

  • Hafiz Muhammad Qasim

    (Centre for South Asian Studies, University of the Punjab, Lahore, Pakistan.)

  • Adeel Ahmad Dar

    (Forman Christian College (A Chartered University), 54000, Lahore, Pakistan.)

Abstract

Purpose: This study tests the Marshall-Lerner condition and the J-curve Phenomenon for Pakistan by using the quarterly data from the third quarter of 1970 till the fourth quarter of 2012. Methodology: Johansen’s Cointegration technique and Vector Error Correction models are employed for the purpose of long-run and short-run estimations respectively. Findings: Results of the study indicate that Marshall-Lerner condition does hold in the long run for Pakistan but not in the short run, thus supporting the phenomenon of J-curve. But it is found that the absolute sum of imports and exports price elasticities of demand barely exceed 1, indicating that a real devaluation of rupee will only improve the trade balance of Pakistan a little. Therefore, in case of Pakistan, devaluation/depreciation of rupee cannot be considered as an important policy instrument to decrease the deficit in balance of payments due to its weak influence over the trade balance. Furthermore, the results of the study hold for the real exchange rate devaluation only and not necessarily for the nominal devaluation, since it is found that nominal devaluation does not always result in real devaluation due to increase in the domestic prices relative to the foreign prices. Recommendations: The current study opens up new insights for policy makers.

Suggested Citation

  • Nazeef Ishtiaq & Hafiz Muhammad Qasim & Adeel Ahmad Dar, 2016. "Testing the Marshall-Lerner Condition and the J-Curve Phenomenon for Pakistan: Some New Insights," International Journal of Economics and Empirical Research (IJEER), The Economics and Social Development Organization (TESDO), vol. 4(6), pages 307-319, June.
    • Handle: RePEc:ijr:journl:v:4:y:2016:i:6:p:307-319
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    Citations

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    Cited by:

    1. Hafsa Hina, 2020. "Correction of Trade Deficit through Depreciation - A Misdirected Policy: An Empirical Evidence from Pakistan," PIDE-Working Papers 2020:24, Pakistan Institute of Development Economics.
    2. Mahmood, Asif & Zahoor, Muhammad Awais, 2021. "Role of Global Value Chains and Exchange Rate: An Empirical Examination in case of Pakistan," MPRA Paper 115958, University Library of Munich, Germany.
    3. Mohsen Bahmani-Oskooee & Ahmed Usman & Sana Ullah, 2020. "Asymmetric J-curve in the commodity trade between Pakistan and United States: evidence from 41 industries," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 10(2), pages 163-188, June.
    4. Hafsa Hina, 2021. "What Do We Know of Trade Elasticities?," PIDE Knowledge Brief 2021:30, Pakistan Institute of Development Economics.

    More about this item

    Keywords

    Marshall-Lerner condition; J-curve; Real exchange rate; Trade balance;
    All these keywords.

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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