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Is Exchange Rate Effect Trade Balance in Pakistan? Evidence Based on J- Curve

Author

Listed:
  • Aamir Khan

    (COMSATS University, Islamabad, Pakistan)

  • Aneel Salman

    (COMSATS University, Islamabad)

  • Muhammad Arshad Khan

    (COMSATS University, Islamabad, Pakistan)

Abstract

This study aims to find out the relationship of how exchange rate effect the balance of trade in Pakistan over the period 1982-2016 within the context of J-curve phenomenon. We employed an Autoregressive Distributed Lag (ARDL) approach to cointegration. To investigate the short run dynamics of the study, we have estimated an error correction model. The unit root results provide a mix of I(0) and I(1) variables. The results of diagnostic tests indicate no econometric problem in the estimated model. The CUSUM and CUSUM of squared test confirms the stability of the estimated model. We summarize the estimated results as follow: first, we found an evidence of cointegration among the variables. Second, the long run results shows significant effect of REER on trade balance in Pakistan. Third, we found an evidence of J-curve in case of Pakistan.

Suggested Citation

  • Aamir Khan & Aneel Salman & Muhammad Arshad Khan, 2019. "Is Exchange Rate Effect Trade Balance in Pakistan? Evidence Based on J- Curve," International Journal of Economic Sciences, International Institute of Social and Economic Sciences, vol. 8(2), pages 60-79, December.
    • Handle: RePEc:sek:jijoes:v:8:y:2019:i:2:p:60-79
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    References listed on IDEAS

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    1. Mohsen Bahmani-Oskooee & Janardhanan Alse, 1994. "Short-Run versus Long-Run Effects of Devaluation: Error-Correction Modeling and Cointegration," Eastern Economic Journal, Eastern Economic Association, vol. 20(4), pages 453-464, Fall.
    2. Waliullah & Mehmood Khan Kakar & Rehmatullah Kakar & Wakeel Khan, 2010. "The Determinants of Pakistan’s Trade Balance: An ARDL Cointegration Approach," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 15(1), pages 1-26, Jan-Jun.
    3. Miles, Marc A, 1979. "The Effects of Devaluation on the Trade Balance and the Balance of Payments: Some New Results," Journal of Political Economy, University of Chicago Press, vol. 87(3), pages 600-620, June.
    4. Zehra Aftab & Sajawal Khan, 2008. "Bilateral J-Curves between Pakistan and Her Trading Partners," PIDE-Working Papers 2008:45, Pakistan Institute of Development Economics.
    5. Jaleel Ahmad & Jing Yang, 2004. "Estimation of the J-Curve in China," Economics Study Area Working Papers 67, East-West Center, Economics Study Area.
    6. Zehra Aftab & Aurangzeb, 2002. "The Long-run and Short-run Impact of Exchange Rate Devaluation on Pakistan's Trade Performance," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 41(3), pages 277-286.
    7. Kumar, Ramesh & Dhawan, Ravinder, 1991. "Exchange rate volatility and Pakistan's exports to the developed world, 1974-85," World Development, Elsevier, vol. 19(9), pages 1225-1240, September.
    8. Rose, Andrew K., 1991. "The role of exchange rates in a popular model of international trade : Does the 'Marshall-Lerner' condition hold?," Journal of International Economics, Elsevier, vol. 30(3-4), pages 301-316, May.
    9. Rose, Andrew K., 1990. "Exchange rates and the trade balance : Some evidence from developing countries," Economics Letters, Elsevier, vol. 34(3), pages 271-275, November.
    10. A. Aurangzeb & Thanasis Stengos & Asif U. Mohammad, 2005. "Short-Run and Long-Run Effects of Exchange Rate Volatility on the Volume of Exports: A Case Study for Pakistan," International Journal of Business and Economics, School of Management Development, Feng Chia University, Taichung, Taiwan, vol. 4(3), pages 209-222, December.
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    More about this item

    Keywords

    Trade Balance; Real Effective Exchange Rate; J-Curve; ARDL;
    All these keywords.

    JEL classification:

    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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