All Theses and Dissertations

Degree

Master of Science in Economics

Faculty / School

Faculty of Business Administration (FBA)

Department

Department of Economics

Date of Award

Fall 2017

Advisor

Dr. Qaiser Munir

Committee Member 1

Dr. Qaiser Munir, Institute of Business Administration, Karachi

Project Type

Thesis

Access Type

Restricted Access

Pages

x, 39

Abstract

Since its inception in (1947), Pakistan has been experiencing several episodes of trade imbalance, disapproving balance of payments and exchange rate volatility. Particularly, Pakistan has experienced currency devaluation for the very first time in 1955 followed by 1972 and 1996. Similarly, in the most recent five fiscal years, Pakistani currency experienced the highest currency devaluation in history. If the currency of a domestic country depreciates, it boosts the domestic country's exports, whereas at the same time imports from the foreign country decreases-higher exports over imports lead to higher trade balances. The depreciated exchange rate cannot adjust trade imbalances instantaneously, rather it first worsens trade balances before achieving equilibrium is known as J-curve. As far as the literature of J-curve in the context of Pakistan is concerned, numerous studies have addressed this important issue using both the aggregate and disaggregate trade data. All the studies have assumed the exchange rate to be symmetric only-implying that currency depreciation improves trade balances while appreciation deteriorates it with the same magnitude. Nevertheless, trade balances respond to exchange rate changes in a nonlinear way therefore, the relationship could be asymmetric. To the best of our knowledge, there has been no study in Pakistan which discusses the asymmetries of the exchange rate and trade balances. Particularly, among the existing literature on J. curve in the context of Pakistan, it is typically confined to only the symmetric relationship of the exchange rate and trade balances which yield mixed outcomes. Hence in this regard, the current the study applies Non-linear Autoregressive Distributed Lag Model (NL-ARDL) of Shin et al., (2014) to examine the asymmetric effects of exchange rate changes on the bilateral trade balances of Pakistan and its 20 major trading partners (i.e., France, Japan, Korea, China, India, Indonesia, Germany, United States of America, United Kingdom, Saudi Arabia, Switzerland, Malaysia, Singapore, Belgium, Canada, Hong-Kong, Australia, Spain, Netherland, and Italy). The data for this study is retrieved from the International Monetary Fund (IMF)and State Bank of Pakistan (SBP) for the period 1982QI-2018Q2. The nonlinear model incorporates both the short run and long run asymmetries of exchange rate changes on trade balances. Specifically, the findings of this study found that the short-run asymmetric effects of real exchange rate exist for countries such as the United Kingdom, Malaysia, Germany, Australia, Netherland, Indonesia, Spain, France, Saudi Arabia and Switzerland that subsequently lasted into long-run asymmetric effects for only five trading partners. This short-run and long-run asymmetries suggest that exchange rate depreciation and appreciation have significantly different impacts on trade balances. Also, the results of the nonlinear model yield more evidence in support of the J-curve phenomenon- implying that Pak. Rupee depreciation causes immediate trade deterioration combined with the long-run improvement which however exists incase of Australia and Netherland.

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