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Effects of the Exchange Rate on Output and Price Level: Evidence from the Pakistani Economy

Author

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  • Munir A. S. Choudhary

    (Department of Economics, University of the Punjab, Pakistan.)

  • Muhammad Aslam Chaudhry

    (Department of Economics, University of the Punjab, Pakistan.)

Abstract

The question of whether devaluation of the currency affects output positively or negatively has received considerable attention both from academic and empirical researchers. A number of empirical studies have supported the contractionary devaluation hypothesis using pooled time series data from a large number of heterogeneous countries. Since the effects of devaluation on output and the price level may not be uniform across all developing countries, the empirical results can not be generalized for all countries. In addition, almost none of the empirical studies used to test the contractionary devaluation hypothesis separate the effects of devaluation from import prices. Thus, a country specific study is needed that separate the effects of devaluation from the import price effects. This paper uses a VEC model to analyze the effects of the exchange rate on output and the price level in Pakistan for the period 1975-2005. Our analysis shows that devaluation has a positive effect on output but a negative effect on the price level. Thus, the evidence presented in this paper does not support the contractionary devaluation hypothesis for the Pakistani economy.

Suggested Citation

  • 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.
    • Handle: RePEc:lje:journl:v:12:y:2007:i:1:p:49-77
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    References listed on IDEAS

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    Cited by:

    1. Phouphet Kyophilavong & Muhammad Shahbaz & Thongphet Lamphayphan & Byoungki Kim & Michael C. S. Wong, 2019. "Are Devaluations Expansionary in Laos?," Global Business Review, International Management Institute, vol. 20(1), pages 72-83, February.
    2. Zakee SAADAT & Dawood MAMOON, 2016. "Destination EU and USA: Improving Export Potential of Pakistan by Trading with India," Journal of Economics and Political Economy, KSP Journals, vol. 3(4), pages 659-669, December.
    3. Muhammad Shahbaz & Faridul Islam & Naveed Aamir, 2012. "Is devaluation contractionary? Empirical evidence for Pakistan," Economic Change and Restructuring, Springer, vol. 45(4), pages 299-316, November.

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