The Effects of Devaluation of Currency on Economic Growth: The Mediating Role of Current Account Deficit

Abstract

This study explores whether Pakistan's current account deficit-acted as a mediator in the linkage between the devaluation of the currency and the expansion of the economy from 1972 to 2016. All the variables have been shown to have a heterogeneous order of integration by using the Augmented Ducky Fuller (ADF), Phillips-Perron (PP), and Ng-Parron unit root tests. As shown in this article, the Auto regressive Distributive Lag Model (ARDL) is used to figure out how the variables are linked. The results clearly demonstrate that the current account balance fully mediates the relationship between devaluation of the currency and economic growth with a coefficient value of -0.12. Findings show that devaluation of the currency negatively affects the current account balance and economic growth. Moreover, through an indirect channel,the devaluation negatively affects the current account balance, which hampers economic growth.