Is devaluation contractionary? empirical evidence for Pakistan

Muhammad Shahbaz, Faridul Islam () and Aamir Naveed

MPRA Paper from University Library of Munich, Germany

Abstract: The paper investigates the effect of real devaluation on economic growth. In the empirical model we also include other theoretically justified variables in the case of Pakistan, such as foreign remittances, money supply, and government spending. The paper implements the ADF method to test check the stationarity of the series; and the ARDL bounds testing approach to cointegration to establish a long run relationship. The findings affirm cointegration among the series. Real devaluation exerts contractionary effect on economic growth. The results from variance decomposition and impulse response-function show unidirectional causality from foreign remittances to economic growth; and bidirectional causality between money supply and foreign remittances. Furthermore, money supply Granger causes government spending; while devaluation Granger causes economic growth, albeit, weakly. The results should help in formulating a comprehensive trade policy including the use of competitive devaluation as a tool to correct balance of payments problems.

Keywords: Devaluation; Contractionary; Cointegration (search for similar items in EconPapers)
JEL-codes: F3 (search for similar items in EconPapers)
Date: 2011-07-27, Revised 2011-08-01
New Economics Papers: this item is included in nep-fdg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Journal Article: Is devaluation contractionary? Empirical evidence for Pakistan (2012)
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