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The Expansionary or Contractionary Effects of Devaluation: Empirical Evidence from Pakistan
Abstract
The current research is the long-term and short run impact of real exchange rate variations on growth for Pakistani annual data from 1973 to 2011. Pesaran and Shin (1999) and Pesaran et al. (2001) introduced the Autoregressive Distributed Lag (ARDL) approach to Co-integration which is employed for empirical analysis. The findings revealed a negative relationship between growth and real effective exchange rate, which is statistically significant at 1%, implying that 1% devaluation in the real effective exchange rate induces a 0.16 percent drop in real GDP, implying that devaluation is contractionary for Pakistan in the long run. The real effective exchange rate has a negative impact on economic growth in the short run, but this is statistically insignificant, suggesting that devaluation is neutral for Pakistan. Other factors such as money supply, government spending, and worker remittances have a positive impact on economic growth, while crude oil prices have a negative impact in the long run. These variables have almost identical impacts on economic growth in the short term.
Authors
Dr. Mahmood ul Hasan
Assistant Professor, Department of Economics, University of Sargodha, Sargodha, Punjab, Pakistan
Mr. Saifullah
Lecturer, Department of Economics, University of Sargodha. Sargodha, Punjab, Pakistan
Dr. Rehmat Ullah
Associate Professor, Department of Economics, University of Sargodha, Sargodha, Punjab, Pakistan
