Empirical Evidence on the J-Curve Between Pakistan and Selected South Asian Trade Partners

Waqar Khalid

doi:10.11648/j.ebm.20170304.11

Abstract

The earlier researches investigated the J-curve hypothesis along with the Marshall-Lerner condition in Pakistan used the OLS, 2SLS, 3SLS, and Instrumental Variables (IV) techniques. The estimates obtained from these studies may suffer from spurious regression problems as the models were estimated without incorporating the co-integrating property of the variables. Hence, the objective of this work is to analyze the trade balance model using relatively the new co-integration approach, the ARDL model. The J-curve phenomenon is tested for Pakistan’s trade with her selected South Asian trade partners, including Republic of India and Democratic Socialist Republic of Sri Lanka using the annual time series data over the 1975-2013 periods. After empirical analysis, it was observed that the J-curve occurrence is rejected in favor of Pakistan with its trading partners. This study concludes that depreciation of Pakistani Rupee has a constructive result on Pakistan’s trade with these trade partners.

Highlights

Devaluation or depreciation of currency is a policy that economies adopt in certain conditions to get better its trade’s performance
In case of long term, this study suggests that the J-curve effect becomes positive though it is insignificant
The findings show that the Marshall-Lerner condition was not satisfied for Pakistan because this finding was based on the aggregate trade data

Summary

Introduction

Devaluation or depreciation of currency is a policy that economies adopt in certain conditions to get better its trade’s performance. The impact of the depreciation of currency is different in the short plus in the long period on the balance of trade for the concerned economy At the beginning, this policy has a downbeat effect lying on the balance of trade; with the passageway of time improvement occurs. This phenomenon describes a "J" formed time series diagram in which the curve initially falls up to certain level and slowly rises to an upper level This effect is found in a trade balance of an economy and in the equity funds returns, i-e. In the beginning, the equity funds yield downbeat per annum returns resulting from initial costs and high administration and managerial fees. Once a fund matures, its value steadily rises showing positive trend and beyond its opening value

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