IS EXCHANGE RATE EFFECT TRADE BALANCE IN PAKISTAN? EVIDENCE BASED ON J- CURVE

Abstract

This study aims to examine the relationship between exchange rate movements and the trade balance in Pakistan over the period 1982–2016 within the context of the J-curve phenomenon. The autoregressive distributed lag (ARDL) approach to cointegration is employed. To investigate short-run dynamics, an error correction model is estimated. Unit root test results indicate a mixture of I(0) and I(1) variables. Diagnostic tests confirm the absence of econometric problems in the estimated model, while the CUSUM and CUSUM of squares tests indicate model stability. The results can be summarized as follows: first, there is evidence of cointegration among the variables; second, long-run results show a significant effect of the real effective exchange rate (REER) on the trade balance in Pakistan; and third, evidence of the J-curve phenomenon is found in the case of Pakistan.

Data:
Received: 29 Sep 2019
Revised: 19 Nov 2019
Accepted: 6 Dec 2019
Published: 20 Dec 2019