Special Edition-07.pdf - Lahore School of Economics

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140 M. Ashraf Janjua Statistical Bulletin, Economic Survey, and Economic Report of the President on the US economy for the year 2006. Results Interpretation Firstly, the time series properties of data have been checked by testing the stationarity of the fundamental variables. The augmented Dickey-Fuller (ADF) criterion has been applied for unit root and the results of the ADF test suggest that all the variables are integrated of order one, i.e. I(1), which fulfills the criteria for estimating any long run relations. The Ordinary Least Square (OLS) has been applied for the estimation of the results. The results are quite encouraging as coefficients and signs in all regressions except rigdp coincide with the earlier empirical studies. In the regression equation, five macroeconomic fundamentals [trade openness (trop), current government consumption to GDP ratio (govc), net capital inflows as % of GDP, real investment to real GDP ratio (rigdp), and total factor productivity differential (tfpd)] determine the REER. Trop, and the increase in govc and capinf caused depreciation in the REER while an increase in rigdp leads to appreciation of the REER. The improvement in tfpd leads to REER appreciation. The coefficient of tfpd is small in all three regressions, which is in line with the recent empirical work. In Pakistan’s case, workers’ remittances are an important source of foreign exchange earnings and finance a large portion of trade and services deficits in the current account balance. Workers’ remittances turn out to be significant and have a positive sign, which reflects that the increase in the remittance inflows cause appreciation of the real exchange rate. Furthermore, the inclusion of the relevant variable, remg, positively affects the overall performance of the regression and causes tot (an important macroeconomic fundamental) to significantly explain the real exchange rate. The positive sign of tot shows that the improvement of tot leads to appreciation of the real exchange rate. However, rigap becomes insignificant with the inclusion of remg and the Wald Test supports the exclusion of rigdp. The residuals generated from these regressions are tested for unit root to establish a long-run cointegrating relationship. These residuals are stationary, as reflected by the results of the unit root test reported, confirming that the above regression is showing a long-run cointegrating relationship between the REER and economic fundamentals.
Pakistan’s External Trade: Does Exchange Rate Misalignment Matter for Pakistan? 141 LRERR = 7.7 - 0.61* LTROP - 0.94* LGOVC + 0.17* LREMG- (8.71) (-4.63) (-7.61) (5.91) 0.03*CAPINF1 + 0.34* LTOT + 0.03*TFPD (1) (-3.34) (3.49) (5.73) R 2 = 0.96 Adj R 2 = 0.94 S.E Regression = 0.07 D.W Statistics= 1.60 Following are the major results of the regression: • As trade openness increases by one %age point of GDP, this leads to real depreciation of 0.61% of the Pak rupee against the basket of currencies • An improvement in terms of trade by one percent causes 0.34% real appreciation of the Pak rupee vis-à-vis the basket of currencies. • An increase in government expenditure of one percentage point of GDP is associated with 0.94% real of depreciation of the Pak rupee against the basket of currencies. • An increase in net capital inflows of one percentage point of GDP causes 0.03% real depreciation of the REER. • An increase in workers’ remittances of one percentage point of GDP leads to a 0.17% real appreciation of the Pak rupee against the basket of currencies. • A one unit reduction in total factor productivity differential relative to trading partners (i.e. US) causes a 0.03% real appreciation of the Pak rupee against the basket of currencies. The estimated regressions also satisfied the diagnostic tests.
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Special Edition ISSN 1811-5438 THE
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11. All references used in the text
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