Main Article Content
Abstract
This study estimates the effects of devaluation and appreciation of real effective exchange rate (REER) on revealed comparative advantage (RCA) at Harmonized System 2-digit level of exports in Pakistan. A non-linear Autoregressive Distribute Lag (ARDL) technique is applied to test the asymmetric evidence. This study employs two models to explore the export performance. Findings/Originality: The results of model 1 estimation confirm the proof of asymmetric ARDL and concludes that devaluation has a positive effect on selected RCA’s index value and helps enhance exports of Pakistan. Meanwhile, the appreciation of REER is having an adverse impact. Model-2 estimates the effect of these selected RCA’s, REER, and world aggregated income (Yw) on the trade balance (TB) of Pakistan. The results estimate that an increase in selected RCA’s index values, world aggregated income, and REER depreciation is useful to decrease in deficit TB of Pakistan.
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References
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- Ahmad, N., & Kalim, R. (2014). Implications of export competitiveness, and performance of textile and clothing sector of Pakistan: Pre and post quota analysis. Pakistan Journal of Commerce and Social Sciences, 8(3), 696–714.
- Baharumshah, A. Z. (2001). The effect of exchange rate on bilateral trade balance: New evidence from Malaysia and Thailand. Asian Economic Journal, 15(3), 291–312. https://doi.org/10.1111/1467-8381.00135
- Bahmani-Oskooee, M. (1991). Is there a long-run relation between the trade balance and the real effective exchange rate of LDCs? Economics Letters, 36(4), 403–407. https://doi.org/10.1016/0165-1765(91)90206-Z
- Bahmani-Oskooee, M. (2001). Nominal and real effective exchange rates of middle eastern countries and their trade performance. Applied Economics, 33(1), 103–111. https://doi.org/10.1080/00036840122490
- Bahmani-Oskooee, M., & Fariditavana, H. (2015). Nonlinear ARDL approach, asymmetric effects and the J-curve. Journal of Economic Studies, 42(3), 519–530. https://doi.org/10.1108/JES-03-2015-0042
- Bahmani-Oskooee, M., & Fariditavana, H. (2016). Nonlinear ARDL approach and the J-curve phenomenon. Open Economies Review, 27(1), 51–70. https://doi.org/10.1007/s11079-015-9369-5
- Bahmani-Oskooee, M., & Ratha, A. (2004). The J-curve: A literature review. Applied Economics, 36(13), 1377–1398. https://doi.org/10.1080/0003684042000201794
- Balassa, B. (1965). Trade liberalisation and “revealed” comparative advantage 1. The Manchester School, 33(2), 99–123. https://doi.org/10.1111/j.1467-9957.1965.tb00050.x
- Baral, K., Roy, B. C., Rahim, K. M. B., Chatterjee, H., Mondal, P., Mondal, D., … Talekar, N. S. (2006). Socio-economic parameters of pesticide use and assessment of impact of an IPM strategy for the control of eggplant fruit and shoot borer in West Bengal, India. Taipei, China: AVRDC - the World Vegetable Center.
- Brown, R. L., Durbin, J., & Evans, J. M. (1975). Techniques for testing the constancy of regression relationships over time. Journal of the Royal Statistical Society: Series B (Methodological), 37(2), 149–192.
- Chinn, M. D. (1991). Some linear and nonlinear thoughts on exchange rates. Journal of International Money and Finance, 10(2), 214–230. https://doi.org/10.1016/0261-5606(91)90036-J
- Chinn, M. D. (2006). A primer on real effective exchange rates: Determinants, overvaluation, trade flows and competitive devaluation. Open Economies Review, 17(1), 115–143. https://doi.org/10.1007/s11079-006-5215-0
- Dickey, D. A., & Fuller, W. A. (1979). Distribution of the estimators for autoregressive time series with a unit root. Journal of the American Statistical Association, 74(366), 76–66. https://doi.org/10.2307/2286348
- Duasa, J. (2007). Determinants of Malaysian trade balance: An ARDL bound testing approach. Global Economic Review, 36(1), 89–102. https://doi.org/10.1080/12265080701217405
- Greenaway, D., & Milner, C. (1993). Evaluating Comparative Advantage. In Trade and industrial policy in developing countries: A manual of policy analysis (pp. 181–208). New York: The Macmillan Press.
- Greenwood, J. (1984). Non-traded goods, the trade balance, and the balance of payments. The Canadian Journal of Economics / Revue Canadienne d’Economique, 17(4), 806–823. https://doi.org/10.2307/135075
- Halicioglu, F. (2008). The J-curve dynamics of Turkey: an application of ARDL model. Applied Economics, 40(18), 2423–2429. https://doi.org/10.1080/00036840600949496
- Henry, C., & Longmore, R. (2003). Current account dynamics and the real effective exchange rate: The Jamaican experience. Jamaica.
- Hoen, A., & Oosterhaven, J. (2006). On the measurement of comparative advantage. The Annals of Regional Science, 40(3), 677–691. https://doi.org/10.1007/s00168-006-0076-4
- Holmes, M. J., & Panagiotidis, T. (2009). Cointegration and asymmetric adjustment: Some new evidence concerning the behavior of the U.S. current account. The B.E. Journal of Macroeconomics, 9(1), 1–25. https://doi.org/10.2202/1935-1690.1665
- Hussain, M., & Bashir, U. (2013). Dynamics of trade balance and the J-curve phenomenon: Evidence from Pakistan. The Journal of Commerce, 5(2), 16–31.
- Kale, P. (2001). Turkey’s trade balance in the short and the long run: Error correction modeling and cointegration. The International Trade Journal, 15(1), 27–56. https://doi.org/10.1080/088539001300005440
- Kamin, S. B., & Rogers, J. H. (1997). Output and the real exchange rate in developing countries: An application to Mexico (International Finance Discussion Papers No. 580). SSRN Electronic Journal. https://doi.org/10.2139/ssrn.774
- Karamelikli, H. (2016). Linear and nonlinear dynamics of the Turkish trade balance. International Journal of Economics and Finance, 8(2), 231–245. https://doi.org/10.5539/ijef.v8n2p70
- Kemal, M. A., & Qadir, U. (2005). Real exchange rate, exports, and imports movements: A trivariate analysis. The Pakistan Development Review, 44(2), 177–195.
- Laursen, K. (1998). Revealed Comparative Advantage and the Alternatives as Measures of International Specialisation.
- Liesner, H. H. (1958). The European common market and british industry. The Economic Journal, 68(270), 302–316. https://doi.org/10.2307/2227597
- Lin, M. L., & Fu, T. W. (2015). Non-linear effect of exchange rates on trade balance: A recommendation for emerging countries’ exchange rate policy. International Journal of Economics and Financial Research, 1(6), 90–96.
- Magee, S. P. (1973). Currency contracts, pass-through, and devaluation. Brookings Papers on Economic Activity, 4(1), 303–325.
- Mahdavi, S. (2000). Do German, Japanese, and U.S. export prices asymmetrically respond to exchange rate changes? Evidence from Aggregate Data. Contemporary Economic Policy, 18(1), 70–81. https://doi.org/10.1111/j.1465-7287.2000.tb00007.x
- Mahdavi, Saeid, & Sohrabian, A. (1993). The exchange value of the dollar and the U.S. trade balance: An empirical investigation based on cointegradon and Granger causality tests. The Quarterly Review of Economics and Finance, 33(4), 343–358. https://doi.org/10.1016/1062-9769(93)90003-3
- Moffett, M. H. (1989). The J-curve revisited: An empirical examination for the United States. Journal of International Money and Finance, 8(3), 425–444. https://doi.org/10.1016/0261-5606(89)90007-7
- Mohammad, S. D., & Hussain, A. (2010). The role of exchange rate on balance of trade: Empirical from Pakistan. European Journal of Social Sciences, 14(1), 140–150.
- Onafowora, O. (2003). Exchange rate and trade balance in east asia: is there a J-curve? Economics Bulletin, 5(18), 1–13.
- Pesaran, H. H., & Shin, Y. (1998). Generalized impulse response analysis in linear multivariate models. Economics Letters, 58(1), 17–29. https://doi.org/10.1016/S0165-1765(97)00214-0
- Pesaran, M. H., Shin, Y., & Smith, R. J. (2001). Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 16(3), 289–326. https://doi.org/10.1002/jae.616
- Proudman, J., & Redding, S. (2000). Evolving patterns of international trade. Review of International Economics, 8(3), 373–396. https://doi.org/10.1111/1467-9396.00229
- Rahman, M., & Mustafa, M. (1996). The dancing of the real exchange rate of US dollar and the US real trade balance. Applied Economics Letters, 3(12), 807–808. https://doi.org/10.1080/135048596355646
- Rahman, M., Mustafa, M., & Burckel, D. V. (1997). Dynamics of the yen-dollar real exchange rate and the US-Japan real trade balance. Applied Economics, 29(5), 661–664. https://doi.org/10.1080/000368497326868
- Rose, A. K., & Yellen, J. L. (1989). Is there a J-curve? Journal of Monetary Economics, 24(1), 53–68. https://doi.org/10.1016/0304-3932(89)90016-0
- Shahid, I., & Afzal, M. V. (2013). Impact of currency devaluation on the exports: A comparative study on Pakistan, Bangladesh and India. A Research Journal of Commerce, Economics and Social Science, 7(1), 20–31.
- Shin, Y., Yu, B., & Greenwood-Nimmo, M. (2014). Modelling asymmetric cointegration and dynamic multipliers in a nonlinear ARDL framework. In W. Horrace & R. Sickles (Eds.), The Festschrift in Honor of Peter Schmidt (pp. 281–314). Springer. https://doi.org/10.1007/978-1-4899-8008-3__9
- Smith, S. P. (1976). Pay differentials between federal government and private sector workers. Industrial and Labor Relations Review, 31(3), 179–197.
- Vollrath, T. (1991). A theoretical evaluation of alternative trade intensity measures of revealed comparative advantage. Review of World Economics (Weltwirtschaftliches Archiv), 127(2), 265–280. https://doi.org/10.1007/BF02707986
- Waliullah, Kakar, M., Kakar, R., & Khan, W. (2010). The determinants of Pakistan’s trade balance: An ARDL cointegration approach. The Lahore Journal of Economics, 15(1), 1–26. https://doi.org/10.35536/lje.2010.v15.i1.a1
References
Ahmad, N., & Kalim, R. (2013). Changing revealed comparative advantage of textile and clothing sector of Pakistan: Pre and post quota analysis. Pakistan Journal of Commerce and Social Sciences, 7(3), 534–558.
Ahmad, N., & Kalim, R. (2014). Implications of export competitiveness, and performance of textile and clothing sector of Pakistan: Pre and post quota analysis. Pakistan Journal of Commerce and Social Sciences, 8(3), 696–714.
Baharumshah, A. Z. (2001). The effect of exchange rate on bilateral trade balance: New evidence from Malaysia and Thailand. Asian Economic Journal, 15(3), 291–312. https://doi.org/10.1111/1467-8381.00135
Bahmani-Oskooee, M. (1991). Is there a long-run relation between the trade balance and the real effective exchange rate of LDCs? Economics Letters, 36(4), 403–407. https://doi.org/10.1016/0165-1765(91)90206-Z
Bahmani-Oskooee, M. (2001). Nominal and real effective exchange rates of middle eastern countries and their trade performance. Applied Economics, 33(1), 103–111. https://doi.org/10.1080/00036840122490
Bahmani-Oskooee, M., & Fariditavana, H. (2015). Nonlinear ARDL approach, asymmetric effects and the J-curve. Journal of Economic Studies, 42(3), 519–530. https://doi.org/10.1108/JES-03-2015-0042
Bahmani-Oskooee, M., & Fariditavana, H. (2016). Nonlinear ARDL approach and the J-curve phenomenon. Open Economies Review, 27(1), 51–70. https://doi.org/10.1007/s11079-015-9369-5
Bahmani-Oskooee, M., & Ratha, A. (2004). The J-curve: A literature review. Applied Economics, 36(13), 1377–1398. https://doi.org/10.1080/0003684042000201794
Balassa, B. (1965). Trade liberalisation and “revealed” comparative advantage 1. The Manchester School, 33(2), 99–123. https://doi.org/10.1111/j.1467-9957.1965.tb00050.x
Baral, K., Roy, B. C., Rahim, K. M. B., Chatterjee, H., Mondal, P., Mondal, D., … Talekar, N. S. (2006). Socio-economic parameters of pesticide use and assessment of impact of an IPM strategy for the control of eggplant fruit and shoot borer in West Bengal, India. Taipei, China: AVRDC - the World Vegetable Center.
Brown, R. L., Durbin, J., & Evans, J. M. (1975). Techniques for testing the constancy of regression relationships over time. Journal of the Royal Statistical Society: Series B (Methodological), 37(2), 149–192.
Chinn, M. D. (1991). Some linear and nonlinear thoughts on exchange rates. Journal of International Money and Finance, 10(2), 214–230. https://doi.org/10.1016/0261-5606(91)90036-J
Chinn, M. D. (2006). A primer on real effective exchange rates: Determinants, overvaluation, trade flows and competitive devaluation. Open Economies Review, 17(1), 115–143. https://doi.org/10.1007/s11079-006-5215-0
Dickey, D. A., & Fuller, W. A. (1979). Distribution of the estimators for autoregressive time series with a unit root. Journal of the American Statistical Association, 74(366), 76–66. https://doi.org/10.2307/2286348
Duasa, J. (2007). Determinants of Malaysian trade balance: An ARDL bound testing approach. Global Economic Review, 36(1), 89–102. https://doi.org/10.1080/12265080701217405
Greenaway, D., & Milner, C. (1993). Evaluating Comparative Advantage. In Trade and industrial policy in developing countries: A manual of policy analysis (pp. 181–208). New York: The Macmillan Press.
Greenwood, J. (1984). Non-traded goods, the trade balance, and the balance of payments. The Canadian Journal of Economics / Revue Canadienne d’Economique, 17(4), 806–823. https://doi.org/10.2307/135075
Halicioglu, F. (2008). The J-curve dynamics of Turkey: an application of ARDL model. Applied Economics, 40(18), 2423–2429. https://doi.org/10.1080/00036840600949496
Henry, C., & Longmore, R. (2003). Current account dynamics and the real effective exchange rate: The Jamaican experience. Jamaica.
Hoen, A., & Oosterhaven, J. (2006). On the measurement of comparative advantage. The Annals of Regional Science, 40(3), 677–691. https://doi.org/10.1007/s00168-006-0076-4
Holmes, M. J., & Panagiotidis, T. (2009). Cointegration and asymmetric adjustment: Some new evidence concerning the behavior of the U.S. current account. The B.E. Journal of Macroeconomics, 9(1), 1–25. https://doi.org/10.2202/1935-1690.1665
Hussain, M., & Bashir, U. (2013). Dynamics of trade balance and the J-curve phenomenon: Evidence from Pakistan. The Journal of Commerce, 5(2), 16–31.
Kale, P. (2001). Turkey’s trade balance in the short and the long run: Error correction modeling and cointegration. The International Trade Journal, 15(1), 27–56. https://doi.org/10.1080/088539001300005440
Kamin, S. B., & Rogers, J. H. (1997). Output and the real exchange rate in developing countries: An application to Mexico (International Finance Discussion Papers No. 580). SSRN Electronic Journal. https://doi.org/10.2139/ssrn.774
Karamelikli, H. (2016). Linear and nonlinear dynamics of the Turkish trade balance. International Journal of Economics and Finance, 8(2), 231–245. https://doi.org/10.5539/ijef.v8n2p70
Kemal, M. A., & Qadir, U. (2005). Real exchange rate, exports, and imports movements: A trivariate analysis. The Pakistan Development Review, 44(2), 177–195.
Laursen, K. (1998). Revealed Comparative Advantage and the Alternatives as Measures of International Specialisation.
Liesner, H. H. (1958). The European common market and british industry. The Economic Journal, 68(270), 302–316. https://doi.org/10.2307/2227597
Lin, M. L., & Fu, T. W. (2015). Non-linear effect of exchange rates on trade balance: A recommendation for emerging countries’ exchange rate policy. International Journal of Economics and Financial Research, 1(6), 90–96.
Magee, S. P. (1973). Currency contracts, pass-through, and devaluation. Brookings Papers on Economic Activity, 4(1), 303–325.
Mahdavi, S. (2000). Do German, Japanese, and U.S. export prices asymmetrically respond to exchange rate changes? Evidence from Aggregate Data. Contemporary Economic Policy, 18(1), 70–81. https://doi.org/10.1111/j.1465-7287.2000.tb00007.x
Mahdavi, Saeid, & Sohrabian, A. (1993). The exchange value of the dollar and the U.S. trade balance: An empirical investigation based on cointegradon and Granger causality tests. The Quarterly Review of Economics and Finance, 33(4), 343–358. https://doi.org/10.1016/1062-9769(93)90003-3
Moffett, M. H. (1989). The J-curve revisited: An empirical examination for the United States. Journal of International Money and Finance, 8(3), 425–444. https://doi.org/10.1016/0261-5606(89)90007-7
Mohammad, S. D., & Hussain, A. (2010). The role of exchange rate on balance of trade: Empirical from Pakistan. European Journal of Social Sciences, 14(1), 140–150.
Onafowora, O. (2003). Exchange rate and trade balance in east asia: is there a J-curve? Economics Bulletin, 5(18), 1–13.
Pesaran, H. H., & Shin, Y. (1998). Generalized impulse response analysis in linear multivariate models. Economics Letters, 58(1), 17–29. https://doi.org/10.1016/S0165-1765(97)00214-0
Pesaran, M. H., Shin, Y., & Smith, R. J. (2001). Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 16(3), 289–326. https://doi.org/10.1002/jae.616
Proudman, J., & Redding, S. (2000). Evolving patterns of international trade. Review of International Economics, 8(3), 373–396. https://doi.org/10.1111/1467-9396.00229
Rahman, M., & Mustafa, M. (1996). The dancing of the real exchange rate of US dollar and the US real trade balance. Applied Economics Letters, 3(12), 807–808. https://doi.org/10.1080/135048596355646
Rahman, M., Mustafa, M., & Burckel, D. V. (1997). Dynamics of the yen-dollar real exchange rate and the US-Japan real trade balance. Applied Economics, 29(5), 661–664. https://doi.org/10.1080/000368497326868
Rose, A. K., & Yellen, J. L. (1989). Is there a J-curve? Journal of Monetary Economics, 24(1), 53–68. https://doi.org/10.1016/0304-3932(89)90016-0
Shahid, I., & Afzal, M. V. (2013). Impact of currency devaluation on the exports: A comparative study on Pakistan, Bangladesh and India. A Research Journal of Commerce, Economics and Social Science, 7(1), 20–31.
Shin, Y., Yu, B., & Greenwood-Nimmo, M. (2014). Modelling asymmetric cointegration and dynamic multipliers in a nonlinear ARDL framework. In W. Horrace & R. Sickles (Eds.), The Festschrift in Honor of Peter Schmidt (pp. 281–314). Springer. https://doi.org/10.1007/978-1-4899-8008-3__9
Smith, S. P. (1976). Pay differentials between federal government and private sector workers. Industrial and Labor Relations Review, 31(3), 179–197.
Vollrath, T. (1991). A theoretical evaluation of alternative trade intensity measures of revealed comparative advantage. Review of World Economics (Weltwirtschaftliches Archiv), 127(2), 265–280. https://doi.org/10.1007/BF02707986
Waliullah, Kakar, M., Kakar, R., & Khan, W. (2010). The determinants of Pakistan’s trade balance: An ARDL cointegration approach. The Lahore Journal of Economics, 15(1), 1–26. https://doi.org/10.35536/lje.2010.v15.i1.a1