Trade Balance Response to Shocks in Monetary Policy and Exchange Rate: Evidence from Pakistan Using Svecm Approach

By Nizamani, Abdul Rahman; Karim, Zulkefly Abdul et al. | International Journal of Business and Society, January 1, 2017 | Go to article overview

Trade Balance Response to Shocks in Monetary Policy and Exchange Rate: Evidence from Pakistan Using Svecm Approach


Nizamani, Abdul Rahman, Karim, Zulkefly Abdul, Zaidi, Mohd Azlan Shah, Khalid, Norlin, International Journal of Business and Society


(ProQuest: ... denotes formulae omitted.)

1.INTRODUCTION

The short run effects of the monetary policy on an economy have provided the leverage for policy makers to control the internal and external balance of a country. It is important for the policy makers to know the direction and the magnitude of the policy changes, so as to implement monetary policy as the stabilizing policy. The role of monetary policy in the emerging market economies is much highlighted due to the trade vulnerability in these economies. The small emerging economies are considered as the price receivers rather than price setters in the international market, in return these economies are prone to the adverse shocks. Therefore, the monetary policy is required to overlook the external position to maintain the competitiveness in international trade. There are two possible channels through which monetary policy influence the trade balance, the expenditure switching and the income channel.

The monetary policy changes trigger both channel in opposite directions, and the variations in trade balance rely on the dominant channel between them (Kim 2001a, 2001b). Hence, for the effective monetary policy it is crucial to know the strength of expenditure switching and the income channel.

Pakistan as an emerging economy has been facing the dual challenge in internal and external balance. In order to tackle the internal balance as the primary objective, since 2005 the State Bank of Pakistan (SBP) has followed the tight monetary policy for nearly a decade to reduce the inflationary pressure on the economy. On the external balance, particularly in the current accounts, Pakistan has remained the trade deficit country since its inception. In recent years it has recorded the trade deficit of more than 10% of GDP1. In order to mitigate the trade deficit effects on the economy, the SBP has undertaken several attempts of currency devaluation in the past. More precisely, since 2007 the domestic currency has lost more than 50% of its value against U.S dollar. It is evident that SBP has been aggressively engaged in adjusting both the internal and external balances for Pakistan.

However, the tight monetary policy practices to adjust the internal balance of the country can have the implications on the external balance as well. The empirical evidence of the contractionary monetary policy effects on the internal balance suggests a strong consensus among monetary economists. Nevertheless, the evidence on the external balance, particularly on the trade balance has provided mix reaction. Malik (2007) have empirically shown that both internal and external balances play an important role to define the monetary policy stance in Pakistan. He proved that the deviations in trade balance and exchange rate significantly influence the monetary policy stance along with output and inflation rate. These stylized facts of monetary policy conduct raises concern that how does the monetary policy (contractionary) affect the trade balance in Pakistan? This study is aimed to answer this question. Furthermore, we also examine the underline effects on the disaggregated trade balance, this is in order disentangle the monetary policy effects on two broad categories of trade surplus and trade deficit sectors. Cantavella-Jordá & Gutiérrez De Piñeres (2012) have argued that disaggregate analysis is essential for the close examination of monetary policy effects on the sectoral activity.

The present study contributes as following. First, this study has a direct contribution to the monetary policy committee of Pakistan, that whether the monetary policy (contractionary) improves the trade balance? The answer is going to address the effectiveness of monetary policy on the external balance. Second, the present study will bring out further evidence on the effects of the unexpected depreciation of exchange rates on the trade balance of Pakistan. It will provide the implications for the devaluation policy in the country. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Note: primary sources have slightly different requirements for citation. Please see these guidelines for more information.

Cited article

Trade Balance Response to Shocks in Monetary Policy and Exchange Rate: Evidence from Pakistan Using Svecm Approach
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen
Items saved from this article
  • Highlights & Notes
  • Citations
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Search by... Author
    Show... All Results Primary Sources Peer-reviewed

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.