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Are Real Devaluations Contractionary? Empirical Strategy 3

However, here the overall impact of the qgt on the ygt has also been examined without focusing on any particular channel i.e. demand or supply side. For a developing country like Pakistan this expansionary effect of the qgt on the ygt might be come from the aggregate supply channel and particularly because of the bottlenecks in the imported inputs which are using by the manufacturing sector. The main reason for this is that there are no domestic closed substitutes available for this and the country is highly dependent on imported goods. Also the country exports are mostly consist on the agricultural goods whose supply is very price inelastic specifically in the short and medium time periods. However, the overall impact of devaluation on output has been examined without focusing on any particular channel i.e. demand or supply. For a developing country like Pakistan this contractionary effect of the real depreciation on the output can be via supply channel of imported inputs using by the manufacturing sector where the range of the domestic substitutes for these goods is narrow and the country is highly dependent on imports and having weak export structure mostly consist on the agricultural goods whose supply is very price inelastic in the short and medium run. Electronic Payday Loans Online

This argument is also supported by Solimano who in his study for Chile mentioned that in developing countries the supply side resource constraints can dominantly affect the economic activities as a result of the real devaluations. Moreover, two additional variables i.e. tbgt and frgt have also been included in the model which turned significant with the expected signs. The tbgt showed a negative relationship with ygt which shows that an improvement in the tbgt put contractionary effects on ygt. Whereas, the frgt remained positively significant at frgt-1 and negatively significant at frgt-2 and frgt-3. This result of the frgt is also supported by the Polterovich and Popov who mentioned that an increase in the foreign exchange reserves positively affect the output level in an economy as it helps in the increase of investment and capital productivity in an economy. ygt is also influenced by its own lags i.e. ygt-1, ygt-2, ygt-3. However, its overall impact on ygt is still positive like table 1. With the inclusion of the additional variables in the model, the adjusted R2 value increased i.e. 0.70 > 0.45 showing that most of the variation in ygt is explained by the explanatory variables. The DW statistic value is raised to 1.84 which depicts our results are reliable. The post diagnostic tests i.e. Q-statistic, LM-test and the CUSUM stability tests also supported these results. The post diagnostic tests are given in Appendix. The adjusted R2 value show that with the consideration for the regime shifts the R2 value increased (i.e. 0.78 > 0.70 > 0.45). The DW statistic value (2.46) shows that these results are reliable, which is also checked by using the post diagnostic tests i.e. Q-statistic, LM-test and the CUSUM stability test. For details see appendix. In sum, overall the results show that a rise in the qgt put expansionary effects on the ygt, supporting our contractionary hypothesis of the real depreciations. Also it is found that ygt is also dependent on the historical exchange rate systems followed by the State Bank of Pakistan during the study period a three version IS curve approach derived from the backward looking models of Ball has been used.

This post was written by , posted on May 10, 2014 Saturday at 11:29 am