Currency Depreciation and Output Nexus: Evidence from Pakistan

Muhammad Nawaz () and Ejaz Ghani ()

Panoeconomicus, 2018, vol. 65, issue 2, 183-200

Abstract: 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 Pak-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. Key words: Exchange rate, Open-economy IS-LM model, Bounds-testing approach, Crowding out.JEL: F41, F43, G28. Depresijacija valuta kao kanal upravljanja proizvodnjom je bila aktuelna i kontroverzna tema kako u razvijenim zemljama, tako i u zemljama u razvoju. U slučaju Pakistana, relevantna istraživanja bi zahtevala izučavanje godišnjih podataka dostupnih za period od 1972. do 2010. godine. Stacionarnost varijabli koje su različitog stepena integrisanosti zahteva primenu pristupa testiranja ograničenja kointegracije. Nalazi zasnovani na otvorenom ekonomskom IS-LM sistemu navode negativan uticaj depresijacije valute na nivoe proizvodnje. Ovo je u skladu sa dugoročnim procenama modela autoregresivnog distributivnog zaostajanja (ARDL). Kratkoročne procene modela korekcije grešaka (ECM) mogu dovesti do značajnog povećanja nivoa proizvodnje zbog depresijacije Pakistanske Rupije. Vladina potrošnja može prouzrokovati smanjenje proizvodnje u kratkom roku, kao i dugoročno, što daje snažnu podršku hipotezama istiskivanja. Uslovi trgovanja, koji su pozitivni u kratkom roku, negativno su vezani za proizvodnju na dugi rok. Međutim, iznenadni priliv novca nije značajan u dugoročnom i kratkoročnom ECM-u. Zemlji bi bio potreban jasan dugoročni režim politike koji inspiriše poverenje međunarodne zajednice i vraća poverenje izvoznika. Ključne reči: devizni kurs, otvoreni ekonomski IS-LM model, pristup testiranja ograničenja, istiskivanje.

Keywords: Exchange Rate; Open-economy IS-LM Model; Bounds-testing Approach; Crowding out (search for similar items in EconPapers)
Date: 2018
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