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Correction of Trade Deficit through Depreciation - A Misdirected Policy: An Empirical Evidence from Pakistan

Author

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  • Hafsa Hina

    (Pakistan Institute of Development Economics, Islamabad.)

Abstract

The favorable trade balance is a good indicator for developing economies. But the correction of trade deficit through depreciation of exchange rate is a misdirected policy tool. This study clears this misperception by measuring the elasticity of exports, imports and balance of trade with respect to real exchange rate in Pakistan. Further, it also investigates whether trade elasticities are sensitive to different trade regimes and exchange rate policies during time period from 1982 to 2019. The Johansen et al., (2000) structural break cointegration technique is applied for analysis. The results reveal that devaluation is not good for boosting the demand of exports but it increase the demand for imports and ultimately deteriorate the trade balance. Therefore, study rejects the existence of J-curve in Pakistan. Therefore, exchange rate policy can do nothing on the structure. In fact, the need for a devaluation is the inefficiencies in the structure of the economy.

Suggested Citation

  • 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.
    • Handle: RePEc:pid:wpaper:2020:24
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    File URL: https://www.pide.org.pk/pdf/Working%20Paper/WorkingPaper-2020-24.pdf
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    References listed on IDEAS

    as
    1. Shah, Anwar & Majeed, Muhammad Tariq, 2014. "Real Exchange Rate and Trade Balance in Pakistan: An ARDL Co-integration Approach," MPRA Paper 57674, University Library of Munich, Germany.
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    6. Hafsa Hina & Abdul Qayyum, 2015. "Re-estimation of Keynesian Model by Considering Critical Events and Multiple Cointegrating Vectors," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 54(2), pages 123-145.
    7. Morris Goldstein & Mohsin S. Khan, 2017. "The Supply and Demand for Exports: A Simultaneous Approach," World Scientific Book Chapters, in: TRADE CURRENCIES AND FINANCE, chapter 2, pages 83-104, World Scientific Publishing Co. Pte. Ltd..
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    11. Søren Johansen & Rocco Mosconi & Bent Nielsen, 2000. "Cointegration analysis in the presence of structural breaks in the deterministic trend," Econometrics Journal, Royal Economic Society, vol. 3(2), pages 216-249.
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    Cited by:

    1. 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.

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    More about this item

    Keywords

    Imports; Exports; Trade balance; real exchange rate; Marshall-Lerner condition; Cointegration; Structural Break;
    All these keywords.

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: 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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