M. Aynul Hasan

Bio: M. Aynul Hasan is an academic researcher. The author has contributed to research in topics: Monetary policy & Balance of payments. The author has an hindex of 2, co-authored 2 publications receiving 53 citations.

Impact of devaluation on Pakistan's external trade : an econometric approach

Abstract: Exchange rate policy to improve external competitiveness has now become the centre piece of any adjustment effort. It is expected that a nominal devaluation will result in expenditure switching, increased production of tradeable, higher exports, and in an improvement of the external accounts of the country in question. Recently, the traditional stabilisation packages, and especially their devaluation component, have come under attack by a number of authors.! It has been argued that devaluation can be counterproductive because exports and imports are relatively insensitive to price and exchange rate changes, especially in developing and semi-industrialised countries.2.3 If the price elasticities of imports and exports are sufficiently low, the trade balance expressed in domestic currency may worsen. Grubel (1976) has argued that a country's persistent payments imbalances can be due only to faulty monetary policy and cannot be corrected by either devaluation (exchange rate policy) or the use of fIscal policy. In a recent article, Miles (1979) claims to have provided the requisite evidence to support Grubel's argument. Miles (1979) shows that devaluation does not improve the trade balance but improves the balance of payments. This results implies that the improvement comes through the capital account.

A Rational Expectations Macro-econometric Model of Pakistan's Monetary Policy since 1970s

Abstract: Since April 1985 the operations of the entire financial sector in Pakistan have been transformed into a system which is expected to conform to the laws of 1slamic society. Under this system all banks and other financial institutions are supposed to conduct their borrowing and lending according to an interest free Islamic financial system, except for past commitments which may have been carried over in accordance with original commitments! With this rapid transition towards the interest free banking system in Pakistan, the present decade has witnessed the emergence of the State Bank of Pakistan as a key participant in the area of policy formation. Indeed, the greater participation of the governor and the bank has given rise to a considerable amount of discussion and debate over Pakistan's monetary policy among the academics and politicians at home and abroad. To a large extent, this discussion and analysis has been essentially descriptive, being based upon casual observations rather than tightly formulated econometric models. From the viewpoint of understanding Pakistan's economy over the 1970s and 1980s within the framework of a complete macro model, there is a growing need to empirically establish the mechanisms of monetary policy in Pakistan and to determine its impact on such macro-economic variables as real output and employment.

Pakistan’s Trade Performance vis-à-vis Its Major Trading Partners

Abstract: In contrast to earlier empirical research that documents the import and export price elasticities at an aggregate level, this article estimates bilateral price and income impacts on Pakistan’s trade performance with its four major trading partners, i.e., USA, UK, Germany, and Japan. Using quarterly data for the period 1982-I–1996-IV and the Three-stage Least Square technique, the study documents the impact of real devaluation, real income, export incentives, and domestic inflation on trade performance with respect to each of the four trading partners. In 1982 a major shift occurred in Pakistan’s exchange rate policy. First, a managed float replaced a fixed exchange rate system prevalent since 1947. Secondly, it was delinked from the US dollar and pegged to a basket of currencies, with the US dollar as an intervening/anchor currency. The rationale for the switch in exchange rate regime was that a trade share-weighted float would be responsive to the changing trade flows among major trading partners and bilateral currency fluctuations, and that it would induce greater geographical and commodity diversification of exports. However, the year-to-year variability notwithstanding, the 5-year average share of 4 major trading partners of Pakistan, i.e., USA, UK, Japan, and Germany, has remained in the narrow range of 31-39 percent during 1980-95. The corresponding average for individual countries is USA 10-12 percent, UK 6-7 percent, Germany 5-7 percent, and Japan 11-13 percent. During the same period, these four countries (combined) accounted for an average 53-68 percent of the total trade deficit of Pakistan. Moreover, export commodity diversification remains weak. Textile yarn and its manufactures dominate and constitute 72 to 85 percent of total exports to each of the four countries during 1990–1995. Sajjad Akhtar and Fauzia Malik are Principal Economist and Research Officer, respectively, at the

Real Exchange Rate Changes and the Trade Balance: The Evidence from Pakistan

Abstract: This study uses quarterly data from July 1980 to June 2006 to explore the relationship between changes in real exchange rate and the trade balance of Pakistan. Applying the Auto Regressive Distributed Lag (ARDL) approach to cointegration, we examine the existence of a possible long-run relationship. We find the following: (1) a long-run relationship between the series exists, and (2) the coefficient of elasticity is negative and statistically significant, which does not support for the J-relation. Given this, the policymakers should take a conservative approach in using currency devaluation to cure the fundamental disequilibrium in the balance of payments. It is likely that such policy may not produce the desired outcome—i.e., the trade balance may not improve.

The Long-run and Short-run Impact of Exchange Rate Devaluation on Pakistan's Trade Performance

Abstract: In estimating trade elasticities for Pakistan, most previous researchers have employed non-stationary data and OLS or 2SLS techniques. In this paper we use Johansen’s cointegration methodology to re-investigate the long-run trade elasticities and existence of the Marshall-Lerner condition. Using quarterly data, the trade performance with Pakistan’s ten major trading partners is empirically tested. Moreover, we also investigate the short-run exchange rate dynamics by constructing an error-corrrection model to trace the j-curve.

Exchange Rate and Inflation Dynamics

Abstract: This paper studies simultaneous determination of nominal exchange rate and domestic price level in Pakistan The estimated model contains sufficient built-in dynamics to trace the pattern and speed of adjustment in the two variables in response to temporary or permanent shocks The two domestic shocks considered in the paper are monetary and real shocks, while the three external shocks considered are import price, export price and foreign exchange reserves shocks The study finds that the impact period effects of temporary shock on price level and exchange rate are divergent, while the long run effects are convergent This means that, while purchasing power parity does not hold in the short run, there is a tendency in the system to regain relative parity in the long run Further more continuation of shocks can produce a persistent but non-accelerating divergence between inflation rate and the rate of devaluation Therefore the parity holds in a weaker sense, that is for the marginal fluctuations in the rates of changes in price level and exchange rate over time It is also observed that the direction of temporary disparity between the rates of inflation and devaluation depends crucially on the origin of the shock The shocks with direct effect on price level (exchange rate) have more pronounced effects on the rate of inflation (devaluation) Finally, the relationship between price level and exchange rate is not unidirectional, though the short run effect of devaluation on inflation is smaller than the effect of inflation on devaluation Since movements in exchange rate are mostly driven by price inflation, the practice of using exchange rate as an independent instrument is not sustainable in the presence of inflation From policy perspective both the inflation and exchange rate could be considered as interrelated targets while focusing on the instruments that are in effective control of policy-makers, such as money supply

The Exchange Value of the Pakistan Rupee & Pakistan Trade Balance: An ARDL Bounds Testing Approach

Abstract: Results of previous studies on the correlation between exchange rate changes and trade balance are unpersuasive. The present endeavor tries to understand the direction of changes between trade balance and exchange rate and how the depreciation in exchange rate takes place by incorporating the absorption and monetary approaches including Marshal Lerner condition. Our results reveal that existence of long run relationship between exchange rate, income and money supply on trade balance examined through ARDL bounds testing approach. The lag of dependent variable i.e. trade balance has significant impact on the current year trade balance due to pervious year trade policy. At the same time, depreciation in exchange rate deteriorates the trade balance thus adoption of such trade policies that boost the trade balance in future are desirable. The results have also been indicated that beneficial impact of trade policies on trade balance is nullifying by the exchange rate depreciation. Low level of money supply rather than income plays an important role to improve the trade balance in Pakistan. The prevalence of Keynesian postulation exists in Pakistan that states 'income increase will encourage general public to purchase more imported goods and thus deteriorates the trade balance'. This paper would highlight some new insights for policy formulation regarding trade, exchange rate, and economic growth.