Nonlinearity between RER and Trade Balance: A Case Study of Pakistan

Abdul Qayyum, Sidra Nazir and Muhammad Jawad

MPRA Paper from University Library of Munich, Germany

Abstract: Exchange rate is an important factor to bring change in trade balance of any country. In this study the true relationship that is nonlinear; have been examined empirically between trade balance and real exchange rate for Pakistan vs USA. By using monthly data (1980m1 to 2014m2) linear and nonlinear models are estimated by using Johansen cointegration technique (1988). The negative sign of RER2 confirms the nonlinear relationship in case of bilateral trade between these two countries. Existence J-curve in case of Pakistan has been confirmed by long run and short run results, as in long run exchange rate improves the trade balance but in short run it depreciated Hussain and Bashir (2013) and Magee (1973). Finally the nonlinear model showed better forecast performance examined by RMSE and MAE.

Keywords: Exchange Rate; Trade Balance; Non-Linear Model; Cointegration; J-Curve (search for similar items in EconPapers)
JEL-codes: C4 F1 F31 (search for similar items in EconPapers)
Date: 2016-07
New Economics Papers: this item is included in nep-opm
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