Does Harbergerâ€“Laursenâ€“Metzler (HLM) Exist in Pakistan? Cointegration, Causality and Forecast Error Variance Decomposition Tests
Khalid Ahmed () and
Muhammad Shahbaz ()
Global Business Review, 2016, vol. 17, issue 4, 759-778
This article investigates the validation of Harbergerâ€“Laursenâ€“Metzler hypothesis using Pakistani data over the period of 1978Q1â€“2012Q4. We have used Gregoryâ€“Hansen cointegration approach accommodating structural break in the series. The results confirm the presence of cointegration between the variables. The impact of terms of trade is positive on Pakistanâ€™s trade balance. Domestic income improves local trade balance. Foreign income has a positive impact on Pakistanâ€™s trade balance. The causality analysis indicates the presence of feedback effect between terms of trade and trade balance. Domestic income Granger causes trade balance. The unidirectional causality is running from foreign income to Pakistanâ€™s trade balance. This study opens up new directions for policymakers for improvements in terms of trade to sustain trade balance in Pakistan.
Keywords: Terms of trade; trade balance; Pakistan (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:sae:globus:v:17:y:2016:i:4:p:759-778
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