Intra Industry Trade, Fiscal Policy and Terms of Trade Of Pakistan: A Long Run Analysis Using ARDL Technique

Abstract

This study investigates long run relationship between Intra Industry Trade, fiscal policy and Terms of Trade of Pakistan. Considering the intention, time series data having time span from 1972 to 2014 is chosen. Data is collected through various sources like World Development Indicators, Handbook of Statistics on Pakistan Economy (2010) and Economic Survey of Pakistan (2014 – 15). After observing mixed stationary results of the variables [I(0), I(1)] using Augmented Dickey Fuller test, autoregressive and distributed lag model technique is applied for the analysis. For estimating elasticities of terms of trade with respect to the variables, log – log form of the model is utilized. The study reveals Intra Industry Trade, Real Gross Capital Formation and Real Government Expenditure as significant causes of improving Terms of Trade of Pakistan. On the other side, Terms of Trade of Pakistan is deteriorated due to real Gross Domestic Product and Real Foreign Direct Investment.

Macroeconomic determinants of the real exchange rate in Pakistan

“…The positive sign of workers' remittances implies that remittances come in foreign currency in Pakistan therefore as remittances increase the supply of foreign currency also increases relative to its demand which leads to an increase in the exchange rate. The positive sign of remittances is in line with the findings of Hyder and Mahboob (2006) and Bashir and Luqman (2014).…”

“…Findings showed that the interest rate, money supply, commodity price, and US debt had a negative and significant impact on the exchange rate in the short run, while shocks due to money supply and interest rate are permanent. Bashir and Luqman (2014) studied the determinants of real exchange rates in Pakistan using time series data from 1973 to 2013. Results showed that terms of trade and price level depreciated the real exchange rate, while trade restrictions and workers' remittances appreciated the real exchange rate of Pakistan in the long run.…”

“…Saeed et al (2012) showed debt, stock of money, political instability, and foreign reserve balance as determinants. Bashir and Luqman (2014) found terms of trade, price level, trade restrictions, and workers' remittances as determinants. Bhat et al (2017) found foreign debt, domestic interest rate, real income, and money supply as factors affecting the exchange rate in Pakistan.…”