Currency depreciation and output nexus: Evidence from Pakistan

Nawaz, M. Saqib; Ghani, Ejaz

doi:10.2298/pan151222027n

Cited by 4 publications

(7 citation statements)

References 36 publications

(52 reference statements)

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“…This suggests that ERV decreases with unexpected variations in output. The result is in line with an early study of Nawaz and Ghani (2018). The results also show that the VTO significantly, negatively affects ERV, suggesting that higher variations in terms of trade result in low variations in exchange rates.…”

Section: Estimation Resultssupporting

confidence: 91%

“…Turning to Indonesia, we observe from the table that VIPI has a negative and significant effect on Rupiah/US dollar ERV, suggesting that fluctuation in exchange rates decreases as a result of higher productivity (Nawaz and Ghani, 2018). The table also shows that VGOLDP has positive and significant impacts on EXV, suggesting that unexpected variations in exchange rates increase with variations in gold price.…”

Section: Estimation Resultsmentioning

confidence: 90%

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Empirical determinants of exchange-rate volatility: evidence from selected Asian economies

Rashid

Basit

2021

JCEFTS

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Purpose This paper aims to explore the empirical determinants of exchange-rate volatility (ERV) in selected Asian economies, namely, Bangladesh, China, India, Indonesia, Malaysia and Pakistan. Specifically, it examines how the volatility of foreign reserves, government spending, industrial production, gold prices and terms of trade affect monthly ERV during the examined period. Design/methodology/approach The authors carry out the empirical analysis by using monthly data for the period January 1997–March 2019. First, the volatility of the underlying variables is measured based on the conditional variances obtained by estimating the univariate (generalized) autoregressive conditional heteroskedasticity [(G)ARCH] model for each variable during the study period. Next, the autoregressive conditional heteroscedasticity (ARCH)-Lagrange multiplier test is applied to ensure that there are no remaining ARCH effects in the residuals. Finally, the multivariate autoregressive-moving average-GARCH (1, 1) models are estimated to examine whether and how the volatility of the underlying variables affects ERV. Findings The results reveal that the current period volatility of exchange rates is significantly affected by ERV in the previous period in all selected countries. The results also indicate that the volatilities of the underlying macroeconomic variables are quite differently related to ERV in examined Asian countries. Foreign-reserve volatility (VFXRES) has negative and significant impacts on ERV in Bangladesh, China and Malaysia. Government-spending volatility is negatively related to ERV in India, whereas it is positively related to ERV in all other examined countries. The results also suggest that although terms-of-trade volatility reduces ERV in both Bangladesh and Pakistan, it amplifies ERV in the remaining examined countries. However, gold-price volatility (VGOLDP) significantly, positively contributes to ERV in Bangladesh, Indonesia and Malaysia. On the contrary, the higher volatility in industrial production (VIPI) results in lower ERV in Indonesia and Pakistan, whereas it increases ERV in China, India and Malaysia. Practical implications The findings have several important policy implications. First, the findings suggest that both Bangladesh and Malaysia should keep an adequate level of foreign reserves to stabilize their foreign exchange rates. Second, as government-spending volatility has a vital role in determining ERV, it is necessary to bring sustainability and continuity in government expenditures. Bangladesh and Pakistan can stabilize their foreign exchange rates by making exports more competitive, viable and accessible. Originality/value This paper significantly contributes to the existing literature by exploring how the behavior of unexpected variations in the factors determining exchange rates affects ERV in selected Asia countries. Most of the published studies have examined the determinants of exchange rates by considering the macroeconomic variables at their levels. Departing from the existing studies, this paper significantly relates the volatility (second moment) of exchange rate determinants to the behavior of ERV. Further, this paper provides firsthand empirical evidence on this issue for the selected Asian economies.

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Section: Estimation Resultssupporting

confidence: 91%

Section: Estimation Resultsmentioning

confidence: 90%

Empirical determinants of exchange-rate volatility: evidence from selected Asian economies

Rashid

Basit

2021

JCEFTS

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“…The study used quarterly data for top ten trading partners of Pakistan. Nawaz and Ghani (2018) established a negative relationship between devaluation and output growth for Pakistan, and Onakoya, Johnson, and Ajibola (2019) also found a negative relationship between devaluation and trade balance for Nigeria in the long run. Masih, Liu, and Pervaiz (2018) found no relationship between devaluation and trade balance for China.…”

Section: Literature Reviewmentioning

confidence: 97%

Impact of Devaluation on Balance of Trade: A Context of Neighboring Countries

Khan¹,

Siddiqui²,

Zahid³

2018

j.financ.econ.res

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Currency devaluation plays an important role in reshaping trade balance counties like China and Malaysia have experienced export-led growth based on maintenance of their devalued currencies. This study provides the effect of recent currency devaluation of Pakistan on its trade with neighboring countries namely China, India, and Iran. The countries are of remarkable importance because the trade climate of the region is in transition in the essence of China-Pakistan Economic Corridor (CPEC). The paper adopts the elasticity approach to test the effect of devaluation by examining Marshall-Lerner condition. The study uses Panel data estimation models to determine import and export elasticities which serve as inputs for Marshall-Lerner condition. The data of monthly frequency is analyzed over the period of January 2005 to May 2018. The empirical results show that Marshall-Lerner condition does not hold for Pakistan bilateral trade to China and India, however, fulfilled for Iran. It suggests that devaluation of December 2017 of PKR has improved the trade balance of Pakistan with Iran but deteriorated with India and China. The results of the study would allow us to understand the cost and benefits of regional trade integration.

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“…These factors affect the output level of developing countries. In Pakistan, these economic problems are severe because of political instability, poor governance, frequent monetary interference, and fiscal discretion (Nawaz & Ghani, 2018).…”

Section: Introductionmentioning

confidence: 99%

Impact of Currency Devaluation on Economic Growth: Evidence from Pakistan

Khan¹,

Khan

Wei

et al. 2022

JMS

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This study examines the impact of currency devaluation on Pakistan's economic growth. Currency devaluation is controversial topics for both developing and developed economies to believe and hope to improve economic growth. In this study, the model used to find the cointegration between variables. The annual time series data over1990 to 2018, together with ARDL model and Johansson cointegration model used to test whether there is a long-run relationship between economic growth and currency devaluation. Both proposed models indicate that the devaluation of Pakistan’s currency has no significant impact on the long-run changes in economic growth. However, Interest rates and gross capital formation are positive correlated with economic growth in the long run. Currency devaluation is a cure for balance of payment, enhances the competitiveness of the international market and promotes trade balance. Due to some political instability, macroeconomic and environmental conditions in a country, cure is sometimes worse than disease. The paper recommends making the Pakistan economy a sustainable, easy and friendly business environment and looking closer at the economic indicators to make Industrial economic policy. Government must make a good policy for industrialization, instead of currency devaluation, Pakistan industrial sector has a potential to improve the economy, and the authorities should need to create an easy and friendly environment for foreigner business and investors. In addition, allow currency freely to depreciate through market force and efficient money market system, official’s devaluation should be discouraged.

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Currency depreciation and output nexus: Evidence from Pakistan

Cited by 4 publications

References 36 publications

Empirical determinants of exchange-rate volatility: evidence from selected Asian economies

Empirical determinants of exchange-rate volatility: evidence from selected Asian economies

Impact of Devaluation on Balance of Trade: A Context of Neighboring Countries

Impact of Currency Devaluation on Economic Growth: Evidence from Pakistan

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