Main Article Content
Abstract
Purpose ― The present study investigates the asymmetric effect of exchange rate changes on the domestic production of selected South Asian economies from 1980-2019.
Design/Method/Approach―The study introduces nonlinearity into the adjustment process by decomposing the exchange rate into depreciation and appreciation and relying on the Nonlinear ARDL approach to cointegration.
Findings ― The findings show significant evidence of asymmetric effects of exchange rate changes on domestic production in the case of South Asian economies. Surprisingly, depreciation promotes economic growth while appreciation impedes it in almost all economies.
Practical Implications ― The findings refute the notion of symmetry, indicating that depreciation and appreciation have different effects on South Asian economies. An undervalued exchange rate may provide short-term economic relief. The study recommends that a market-based equilibrium exchange rate is crucial for these economies.
Originality/Value ― By using a Nonlinear ARDL approach to separate exchange rate appreciation and depreciation, this study adds to the body of knowledge about the relationship between exchange rate and growth, particularly in South Asia.
Keywords
Article Details
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References
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Aguirre, Á., & Calderón, C. (2005). Real exchange rate misalignments and economic performance (Central Bank of Chile Working Papers No. 315) (Vol. 315). Agustinas.
Ahmad, A., Ahmad, N., & Ali, S. (2013). Exchange rate and economic growth in Pakistan (1975-2011). Journal of Basic and Applied Scientific Research, 3(8), 740–746.
Ahmad, N., Hayat, M. F., Luqman, M., & Ullah, S. (2012). The causal links between foreign direct investment and economic growth in Pakistan. European Journal of Business and Economics, 6, 20–211. https://doi.org/10.12955/ejbe.v6i0.137
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Bahmani-Oskooee, M., & Miteza, I. (2006). Are devaluations contractionary? Evidence from panel cointegration. Economic Issues, 11(1), 49–64.
Bahmani-Oskooee, M., & Mohammadian, A. (2017). Asymmetry effects of exchange rate changes on domestic production in Japan. International Review of Applied Economics, 31(6), 774–790. https://doi.org/10.1080/02692171.2017.1324410
Bahmani-Oskooee, M., Nosheen, M., & Iqbal, J. (2017). Third-country exchange rate volatility and Pakistan-US trade at commodity level. The International Trade Journal, 31(2), 105–129. https://doi.org/10.1080/08853908.2016.1269701
Bahmani‐Oskooee, M., & Baek, J. (2020). On the asymmetric effects of the real exchange rate on domestic investment in G7 countries. Australian Economic Papers, 59(4), 303– 318. https://doi.org/10.1111/1467-8454.12187
Bahmani‐Oskooee, M., & Mohammadian, A. (2016). Asymmetry effects of exchange rate changes on domestic production: Evidence from nonlinear ARDL approach. Australian Economic Papers, 55(3), 181–191. https://doi.org/10.1111/1467-8454.12073
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Chishti, M. Z., Iqbal, J., Mahmood, F., & Azeem, H. S. M. (2020). The implication of the oscillations in exchange rate for the commodity-wise trade flows between Pakistan and China: An evidence from ARDL approach. Review of Pacific Basin Financial Markets and Policies, 23(4), 1–33. https://doi.org/10.1142/S0219091520500307
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De Grauwe, P., & Verfaille, G. (1988). Exchange rate variability. In Misalignment of exchange rates: Effects on trade and industry (pp. 77–104). National Bureau of Economic Research, Inc. Retrieved from http://www.nber.org/chapters/c8055.pdf
Devarajan, S., & Nabi, I. (2006). Economic growth in South Asia: promising, unequalising. Sustainable?. Economic and Political Weekly, 41(33), 3573–3580.
Dhasmana, A. (2015). Transmission of real exchange rate changes to the manufacturing sector: The role of financial access. International Economics, 143, 48–69. https://doi.org/10.1016/j.inteco.2015.04.006
Dornbusch, R., Krugman, P., & Cooper, R. N. (1976). Flexible exchange rates in the short run (Brookings Papers on Economic Activity No. 3).
Easterly, W., & Levine, R. (1997). Africa’s growth tragedy: Policies and ethnic divisions. The Quarterly Journal of Economic, 112(4), 1203–1250.
Farrington, J., & Clarke, J. (2006). Growth poverty reduction and development assistance in Asia: Options and prospects. Development Policy Review, 24(s1), 13–28.
Fischer, S. (1992). Macroeconomic stability and growth. Cuadernos de Economía, 29(87), 171–186.
Granger, C. W. J., & Yoon, G. (2002). Hidden Cointegration (Department of Economics Discussion Paper No. 2002–02). San Diego. https://doi.org/10.2139/ssrn.313831
Gros, D. (1987). Exchange rate variability and foreign trade in the presence of adjustment costs (Working paper Département des Sciences Economiques No. 2619075–8). Exchange rate variability and foreign trade in the presence of adjustment costs: Louvain-la-Neuve.
Hamid, N., & Mir, A. S. (2017). Exchange rate management and economic. The Lahore Journal of Economics, 22, 73–110.
Hasan, M. A., & Khan, A. H. (1994). Impact of devaluation on Pakistan’s external trade: An econometric approach. The Pakistan Development Review, 33(4), 1205–1215.
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Iqbal, G. A. A. J. (2020). Exchange rate volatility with third-country risk impact: A bilateral analysis of Pakistan with major trading partners. Pakistan Social Sciences Review, 4(IV), 29–46.
Iqbal, J., Aziz, S., & Nosheen, M. (2020). The asymmetric effects of exchange rate volatility on US-Pakistan trade flows: New evidence from nonlinear ARDL approach. Economic Change and Restructuring, 5(1), 225–255. https://doi.org/10.1007/s10644-020-09310-8
Iqbal, J., Aziz, S., & Nosheen, M. (2022). The asymmetric effects of exchange rate volatility on US–Pakistan trade flows: New evidence from nonlinear ARDL approach. Economic Change and Restructuring, 55(1), 225–255. https://doi.org/10.1007/s10644-020-09310-8
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