Is devaluation contractionary? Empirical evidence for Pakistan

Shahbaz, Muhammad; Islam, Faridul; Aamir, Naveed

doi:10.1007/s10644-011-9119-7

Cited by 43 publications

(32 citation statements)

References 48 publications

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“…J-curve (Shahbaz et al [16]); devaluation and economic growth (Shahbaz et al [17]); financial development, foreign direct investment and economic growth (Shahbaz and Rahman, [18]); trade openness and economic growth (Shahbaz,[19]) 1 and, money supply and interest rate (Khattak et al. [21]).…”

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confidence: 99%

Analyzing time–frequency relationship between oil price and exchange rate in Pakistan through wavelets

Shahbaz

Tiwari

Tahir

2014

Journal of Applied Statistics

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Abstract:This study analyzes the time-frequency relationship between oil price and exchange rate for Pakistan by using measures of continuous wavelet such as wavelet power, cross-wavelet power, and cross-wavelet coherency. The results of cross-wavelet analysis indicate that covariance between oil price and exchange rate are unable to give clear-cut results but both variables have been in phase and out phase (i.e. they are anti-cyclical and cyclical in nature) in some or other durations. However, results of squared wavelet coherence disclose that both variables are out of phase and real exchange rate was leading during the entire period studied, corresponding to the 10~15 months scale. These results are the unique contribution of the present study, which would have not been drawn if one would have utilized any other time series or frequency domain based approach. This finding provides evidence of anti-cyclical relationship between oil price and real effective exchange rate. However; in most of the period studied, real exchange rate was leading and passing anti-cycle effects on oil price shocks which is the major contribution of the study.

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Analyzing time–frequency relationship between oil price and exchange rate in Pakistan through wavelets

Shahbaz

Tiwari

Tahir

2014

Journal of Applied Statistics

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“…Contrary to the conventional economic wisdom, the new structuralism school of thought stresses on the contractionary effect of devaluation on output level (Magda Kandil 2008). The contractionary devaluation problem critiqued in this literature may arise both from the demand or supply side channels (Edwards 1986;Fouopi Djiogap Constant 2012;Shahbaz, Islam, and Aamir 2016). Obonye Galebotswe and Tshimologo Andrias (2011) and Gil Kim, Lian An, and Yoonbai Kim (2015) construct the case of currency devaluation for developing as well as the developed countries and present the evidence of contractionary devaluation in favor of developing countries, whereas the reverse exists for developed countries.…”

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Currency depreciation and output nexus: Evidence from Pakistan

Nawaz

Ghani

2018

Panoeconomicus

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Currency depreciation as a channel of output management has been a hot and controversial topic in both developed and developing economies. In Pakistan's case, relevant research would require study of annual data available for the period 1972 to 2010. The stationarity of variables under consideration at different orders require the application of the bounds testing approach to cointegration. The findings based on open economy IS-LM framework induce a negative effect of currency depreciation on output levels. This is consistent with the long-run estimates of the autoregressive distributive lag (ARDL) model. The short-run estimates of error-correction model (ECM) may lead to significant increment in output levels because of the depreciation of Pakistan rupee. Government spending may cause to reduce the output in the short-run, as well as, in long-run which furnishes strong support to crowding out hypothesis. The terms of trade, positive in the short-run, are negatively related to output in the long-run. However, surprise money has been insignificant in both long-run and short-run ECM. The country would need a clear long-term policy regime that inspires trust of the international community and restores the exporters' confidence.

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“…Recently some empirical studies (Hamid & Mir, 2017;Javed & Farooq, 2009;Nawaz, 2012;Shahbaz, Islam, & Aamir, 2012) showed depreciation of Pakistani currency to be growth enhancing. The common feature of these studies is that they all have assumed symmetric effect of exchange rate on growth and therefore seem to miss important insights and unable to distinguish and isolate the impact of appreciation from depreciation on economic performance.…”

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An analysis of the asymmetric impact of exchange rate changes on G.D.P. in Pakistan: application of non-linear A.R.D.L.

Hussain

Khan

et al. 2019

Economic Research-Ekonomska Istraživanja

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Exchange rate fluctuations play a vital role in influencing macroeconomic variables including economic growth via the channels of net exports and investments. This study claims to be the first in assessing the asymmetric effect of exchange rate fluctuations on G.D.P. in Pakistan whose currency had the title of 'worst currency of South Asia' in 2018 after more than 20% depreciation in just three months. In this study, we employ a recently developed technique of Non-linear A.R.D.L. by Shin, Yu, and Greenwood-Nimmo (2014) to test for possible asymmetric effect of exchange rate on G.D.P. along with the proxies of fiscal and monetary policies. Both A.R.D.L. and N.A.R.D.L. are applied on annual data range from 1972 to 2014. The results of A.R.D.L. are found poor and co-integration relationship lost when the assumption of symmetry is taken into consideration. On the contrary, Non-linear A.R.D.L. technique carry more rich information related to the issue at hand and co-integration relationship is confirmed. From the results we found that week currency hurts G.D.P. growth, while strong currency adds to growth. Besides these, we confirm asymmetric impact of exchange rate on G.D.P. growth in Pakistan and find the evidence of short-run, long-run and adjustment asymmetry. To achieve the objective of sustained growth, exchange rate management should focus to restore stability and go for more strong currency in Pakistan. Future research needs to consider capital flows and exchange rate regimes in the form of 'Sudden Stop hypothesis' when investigating the asymmetric impact of exchange rate.

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Is devaluation contractionary? Empirical evidence for Pakistan

Cited by 43 publications

References 48 publications

Analyzing time–frequency relationship between oil price and exchange rate in Pakistan through wavelets

Analyzing time–frequency relationship between oil price and exchange rate in Pakistan through wavelets

Currency depreciation and output nexus: Evidence from Pakistan

An analysis of the asymmetric impact of exchange rate changes on G.D.P. in Pakistan: application of non-linear A.R.D.L.

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