IDEAS home Printed from https://ideas.repec.org/a/lje/journl/v12y2007ispp126-152.html
   My bibliography  Save this article

Pakistan’s External Trade: Does Exchange Rate Misalignment Matter for Pakistan?

Author

Listed:
  • M. Ashraf Janjua

    (Dean, College of Business Management, Karachi, and Former Deputy Governor, State Bank of Pakistan.)

Abstract

This paper is primarily aimed at assessing the significance of the exchange rate on Pakistan’s foreign trade. It estimates the Equilibrium Real Effective Exchange Rate (ERER) and exchange rate misalignment for Pakistan using annual data from FY78 to FY06. The Engle Granger co-integration technique is used for the estimation of ERER depending upon various macroeconomic fundamentals as recommended by Edwards (1994). The results of the study are also used for the forecasting of ERER and misalignment up to the year 2010. The results of the study reveal that ERER is determined by variables such as: a) terms of trade, b) trade openness, c) net capital inflows, d) relative productivity differential, e) government consumption, and f) workers’ remittances. The error correction term points to the gradual convergence of the real exchange rate towards the long-run equilibrium level which suggests that the prevailing Pak Rupee exchange rate has not deviated from the ERER and captures economic fundamental trends. Moreover, Pakistan’s foreign trade would depend significantly upon the state of economic fundamentals in the future. Improved economic fundamentals are likely to support trade besides paving the way for enhanced inflows of capital and financial receipts.

Suggested Citation

  • M. Ashraf Janjua, 2007. "Pakistan’s External Trade: Does Exchange Rate Misalignment Matter for Pakistan?," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 12(Special E), pages 126-152, September.
    • Handle: RePEc:lje:journl:v:12:y:2007:i:sp:p:126-152
    as

    Download full text from publisher

    File URL: http://121.52.153.179/JOURNAL/Special%20Edition%20Final%202007/Janjua.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
    2. Kwiatkowski, Denis & Phillips, Peter C. B. & Schmidt, Peter & Shin, Yongcheol, 1992. "Testing the null hypothesis of stationarity against the alternative of a unit root : How sure are we that economic time series have a unit root?," Journal of Econometrics, Elsevier, vol. 54(1-3), pages 159-178.
    3. Chinn, Menzie D., 2000. "Before the fall: were East Asian currencies overvalued?," Emerging Markets Review, Elsevier, vol. 1(2), pages 101-126, September.
    4. Mohsin S. Khan & Axel Schimmelpfennig, 2006. "Inflation in Pakistan: Money or Wheat?," SBP Research Bulletin, State Bank of Pakistan, Research Department, vol. 2, pages 213-234..
    5. George Soros, 1999. "The International Financial Crisis," Challenge, Taylor & Francis Journals, vol. 42(2), pages 58-76, March.
    6. Erlat, Güzin & Arslaner, Ferhat, 1997. "Measuring the Real Exchange Rate: Annual Series for Turkey," MPRA Paper 45999, University Library of Munich, Germany.
    7. Erlat, Güzin & Arslaner, Ferhat, 1997. "Measuring Annual Real Exchange Rate Series for Turkey," MPRA Paper 56396, University Library of Munich, Germany.
    8. Ms. Martine Guerguil & Mr. Martin D Kaufman, 1998. "Competitiveness and the Evolution of the Real Exchange Rate in Chile," IMF Working Papers 1998/058, International Monetary Fund.
    9. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-1580, November.
    10. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Matthew McCartney, 2015. "The Missing Economic Magic: The Failure of Trade Liberalization and Exchange Rate Devaluation in Pakistan, 1980–2012," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 20(Special E), pages 59-86, September.
    2. Farid Makhlouf & Mazhar Mughal, 2013. "Remittances, Dutch Disease, And Competitiveness: A Bayesian Analysis," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 38(2), pages 67-97, June.
    3. Naz, Farah & Mohsin, Asma & Zaman, Khalid, 2012. "Exchange rate pass-through in to inflation: New insights in to the cointegration relationship from Pakistan," Economic Modelling, Elsevier, vol. 29(6), pages 2205-2221.
    4. Muhammad Naveed TAHIR & Faran ALI & Dawood MAMOON, 2016. "Appropriate Exchange Rate Regime for Economic Structure of Pakistan," Turkish Economic Review, KSP Journals, vol. 3(4), pages 629-641, December.
    5. Hamna Ahmed, 2009. "Capital Flows and Real Exchange Rate Overvaluation - A Chronic Ailment: Evidence from Pakistan," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 14(Special E), pages 51-86, September.
    6. Farid Makhlouf & Mazhar Yasin Mughal, 2013. "Remittances, Dutch Disease, and Competitiveness: a Bayesian Analysis," Post-Print hal-01884858, HAL.
    7. Inayat U. Mangla & Jamshed Y. Uppal, 2014. "Macro-economic Policies and Energy Security—Implications for a Chronic Energy Deficit Country," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 53(3), pages 255-273.
    8. Irfan ul Haque, 2011. "The Capital Account and Pakistani Rupee Convertibility: Macroeconomic Policy Challenges," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 16(Special E), pages 95-121, September.
    9. Naved Hamid & Azka Sarosh Mir, 2017. "Exchange Rate Management and Economic Growth: A Brewing Crisis in Pakistan," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 22(Special E), pages 73-110, September.
    10. Zainab Jehan & Iffat Irshad, 2020. "Exchange Rate Misalignment and Economic Growth inPakistan: The Role of Financial Development," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 59(1), pages 81-99.
    11. Mudakkar, Syeda Rabab & Uppal, Jamshed Y. & Zaman, Khalid & Naseem, Imran & Shah, Ghias Ud Din, 2013. "Foreign exchange risk in a managed float regime: A case study of Pakistani rupee," Economic Modelling, Elsevier, vol. 35(C), pages 409-417.
    12. Farid Makhlouf & Mazhar Mughal, 2013. "Remittances, Dutch Disease, And Competitiveness: A Bayesian Analysis," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 38(2), pages 67-97, June.
    13. Saira Tufail & Sadia Batool, 2013. "An Analysis of the Relationship between Inflation and Gold Prices: Evidence from Pakistan," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 18(2), pages 1-35, July-Dec.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Alper, C. Emre & Saglam, Ismail, 1999. "The Equilibrium Real Exchange Rate: Evidence from Turkey," MPRA Paper 1924, University Library of Munich, Germany.
    2. Ahmad Zubaidi Baharumshah & Raj Aggarwal & Chan Tze Haw, 2007. "East Asian Real Exchange Rates and PPP: New Evidence from Panel-data Tests," Global Economic Review, Taylor & Francis Journals, vol. 36(2), pages 103-119.
    3. Aykut Kibritcioglu & Bengi Kibritcioglu, 2004. "Real Exchange Rate Misalignment in Turkey, 1987-2003 (in Turkish)," Macroeconomics 0403006, University Library of Munich, Germany, revised 22 Apr 2004.
    4. Growitsch Christian & Nepal Rabindra & Stronzik Marcus, 2015. "Price Convergence and Information Efficiency in German Natural Gas Markets," German Economic Review, De Gruyter, vol. 16(1), pages 87-103, February.
    5. Xiaojie Xu, 2017. "The rolling causal structure between the Chinese stock index and futures," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 31(4), pages 491-509, November.
    6. Francis Ahking, 2003. "Efficient unit root tests of real exchange rates in the post-Bretton Woods era," Economics Bulletin, AccessEcon, vol. 6(7), pages 1-12.
    7. Peter Rowland & Hugo OLiveros C., 2003. "Colombian Purchasing Power Parity Analysed Using a Framework of Multivariate Cointegration," Borradores de Economia 252, Banco de la Republica de Colombia.
    8. Osmani Teixeira de Carvalho de Guillén & Carlos Hamilton Vasconcelos Araújo, 2005. "O Mecanismo De Transmissão Da Taxa De Câmbio Para Índices De Preços: Uma Análise Vecm Para O Brasil," Anais do XXXIII Encontro Nacional de Economia [Proceedings of the 33rd Brazilian Economics Meeting] 034, ANPEC - Associação Nacional dos Centros de Pós-Graduação em Economia [Brazilian Association of Graduate Programs in Economics].
    9. Wang, Peijie & Brand, Steven, 2015. "A new approach to estimating value–income ratios with income growth and time-varying yields," European Journal of Operational Research, Elsevier, vol. 242(1), pages 182-187.
    10. Pär Österholm, 2005. "The Taylor Rule: A Spurious Regression?," Bulletin of Economic Research, Wiley Blackwell, vol. 57(3), pages 217-247, July.
    11. Boris Hofmann, 2003. "Bank Lending and Property Prices: Some International Evidence," Working Papers 222003, Hong Kong Institute for Monetary Research.
    12. Garg, Bhavesh & Prabheesh, K.P., 2021. "Testing the intertemporal sustainability of current account in the presence of endogenous structural breaks: Evidence from the top deficit countries," Economic Modelling, Elsevier, vol. 97(C), pages 365-379.
    13. Anders Bergvall, 2004. "What Determines Real Exchange Rates? The Nordic Countries," Scandinavian Journal of Economics, Wiley Blackwell, vol. 106(2), pages 315-337, June.
    14. Eleni Constantinou & Avo Kazandjian & Georgios P. Kouretas & Vera Tahmazian, 2008. "Common Stochastic Trends Among The Cyprus Stock Exchange And The Ase, Lse And Nyse," Bulletin of Economic Research, Wiley Blackwell, vol. 60(4), pages 327-349, October.
    15. Derek Bond & Michael J. Harrison & Edward J. O'Brien, 2006. "Purchasing Power Parity: The Irish Experience Re-visited," Trinity Economics Papers tep200615, Trinity College Dublin, Department of Economics.
    16. Hubert Strauß, 2001. "Euroland's Trade with Third Countries: An Estimation Based on NIPA Data," Vierteljahrshefte zur Wirtschaftsforschung / Quarterly Journal of Economic Research, DIW Berlin, German Institute for Economic Research, vol. 70(3), pages 434-449.
    17. Charles Yuji Horioka & Akiko Terada-Hagiwara, 2016. "The Impact of Pre-marital Sex Ratios on Household Saving in Two Asian Countries: The Competitive Saving Motive Revisited," ISER Discussion Paper 0975, Institute of Social and Economic Research, Osaka University.
    18. Haug, Alfred A., 1996. "Tests for cointegration a Monte Carlo comparison," Journal of Econometrics, Elsevier, vol. 71(1-2), pages 89-115.
    19. Jiang, Xiaoquan & Lee, Bong-Soo, 2007. "Stock returns, dividend yield, and book-to-market ratio," Journal of Banking & Finance, Elsevier, vol. 31(2), pages 455-475, February.
    20. Kühl, Michael, 2007. "Cointegration in the foreign exchange market and market efficiency since the introduction of the Euro: Evidence based on bivariate cointegration analyses," University of Göttingen Working Papers in Economics 68, University of Goettingen, Department of Economics.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:lje:journl:v:12:y:2007:i:sp:p:126-152. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Shahid Salahuddin (email available below). General contact details of provider: https://edirc.repec.org/data/lsecopk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.