Exchange Rate Nonlinearities In Pakistan’s Major Exports And Imports

This study on “Exchange Rate Nonlinearities in Pakistan’s Major Exports and Imports” is an effort to study Pakistan’s exports and imports and their nonlinear association with the changes in the value of Pak Rupees with respect to USD. It establishes empirical evidence if exchange rate depreciation and its advocated positive impact on the correction of balance of trade is really valid in case of Pakistan. Instead of using only the Linear Auto-Regressive Distributed Lag (ARDL) Bound Testing Modeling, this study also uses the Non-Linear Auto-Regressive Distributed Lag (NARDL) Bound Testing on Nominal as well as Real exchange rate determinants. Pakistan’s major export and import categories, as categorized by the State bank of Pakistan, including food, machinery, transport, petroleum, textiles, agricultural & other chemicals, metals, and grand totals are analyzed using monthly data of years 2003 through 2019. The study uses the opportunity to analyze Pakistan’s total trade with rest of the world (all countries) using United States of America’s trade as a proxy for this purpose. It is found that the nonlinearity exists only in nine of the thirty two estimations. Therefore, as per this study’s findings, nonlinear impact of the exchange rate may not be applied as rule of the day on all of the foreign trade conducted by Pakistan with its trading partners. Further, the estimation of the Marshal Lerner Condition reveals to have two outputs based on the choice of exchange rate as: first, the absolute sum of export and import elasticities totals to be exactly one implying there would be no impact of currency depreciation on the trade balance if nominal exchange rate is used as a key determinant; On the other hand if real exchange rate is the main determinant of trade balance correction, than the absolute sum of export and import elasticities is 0.8 that is less than 1. Hence, it means the MLC does not meet and the trade balance of Pakistan would deteriorate if the Pak Rupee is depreciated against USD. Finally, the study finds that there is not much difference between the usability of real or nominal exchange rate as key determinant of trade balance of Pakistan. However, only in conjunction with MLC, the RER may be preferred over NER based on the matching of real data vs the estimated output results. Supervisor:- Dr. Hafsa Hina

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Author: Dilavar Khan
Supervisor: Hafsa Hina

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