Trade balance response to shocks in monetary policy and exchange rate

Evidence from Pakistan using SVECM approach

Research output: Contribution to journalArticle

Abstract

This paper examines the effects of monetary policy and exchange rate shocks on the trade balance of Pakistan. These effects are further investigated on the two broad categories of trade surplus and trade deficit sectors. This study has employed the Structural Vector Error Correction Model (SVECM) with a long run and short run restrictions to identify the monetary policy shocks. The results from the SVECM are consistent with the standard theoretical expectations i.e. free from empirical puzzles. The findings have revealed that the trade balance deteriorates to the contractionary monetary policy shocks, providing support to the expenditure switching effects of monetary policy in Pakistan. Furthermore, the effectiveness of monetary policy is only limited to trade surplus sectors. On the other hand, the exchange rate shocks do not support the J-Curve effects on both the aggregate as well as disaggregate level trade balance.

Original languageEnglish
Pages (from-to)579-594
Number of pages16
JournalInternational Journal of Business and Society
Volume18
Issue number3
Publication statusPublished - 1 Dec 2017

Fingerprint

Exchange rates
Vector error correction model
Pakistan
Trade balance
Monetary policy
Monetary policy shocks
Trade surplus
Balance of trade
Trade deficit
Short-run
J-curve
Expenditure

Keywords

  • Exchange rate
  • Monetary policy
  • Pakistan
  • SVECM
  • Trade balance

ASJC Scopus subject areas

  • Business and International Management
  • Finance
  • Economics and Econometrics
  • Strategy and Management

Cite this

@article{52b528160d0c4237b1c4306b5c982981,
title = "Trade balance response to shocks in monetary policy and exchange rate: Evidence from Pakistan using SVECM approach",
abstract = "This paper examines the effects of monetary policy and exchange rate shocks on the trade balance of Pakistan. These effects are further investigated on the two broad categories of trade surplus and trade deficit sectors. This study has employed the Structural Vector Error Correction Model (SVECM) with a long run and short run restrictions to identify the monetary policy shocks. The results from the SVECM are consistent with the standard theoretical expectations i.e. free from empirical puzzles. The findings have revealed that the trade balance deteriorates to the contractionary monetary policy shocks, providing support to the expenditure switching effects of monetary policy in Pakistan. Furthermore, the effectiveness of monetary policy is only limited to trade surplus sectors. On the other hand, the exchange rate shocks do not support the J-Curve effects on both the aggregate as well as disaggregate level trade balance.",
keywords = "Exchange rate, Monetary policy, Pakistan, SVECM, Trade balance",
author = "Nizamani, {Abdul Rahman} and {Abdul Karim}, Zulkefly and Zaidi, {Mohd Azlan Shah} and Norlin Khalid",
year = "2017",
month = "12",
day = "1",
language = "English",
volume = "18",
pages = "579--594",
journal = "International Journal of Business and Society",
issn = "1511-6670",
publisher = "Universiti Malaysia Sarawak",
number = "3",

}

TY - JOUR

T1 - Trade balance response to shocks in monetary policy and exchange rate

T2 - Evidence from Pakistan using SVECM approach

AU - Nizamani, Abdul Rahman

AU - Abdul Karim, Zulkefly

AU - Zaidi, Mohd Azlan Shah

AU - Khalid, Norlin

PY - 2017/12/1

Y1 - 2017/12/1

N2 - This paper examines the effects of monetary policy and exchange rate shocks on the trade balance of Pakistan. These effects are further investigated on the two broad categories of trade surplus and trade deficit sectors. This study has employed the Structural Vector Error Correction Model (SVECM) with a long run and short run restrictions to identify the monetary policy shocks. The results from the SVECM are consistent with the standard theoretical expectations i.e. free from empirical puzzles. The findings have revealed that the trade balance deteriorates to the contractionary monetary policy shocks, providing support to the expenditure switching effects of monetary policy in Pakistan. Furthermore, the effectiveness of monetary policy is only limited to trade surplus sectors. On the other hand, the exchange rate shocks do not support the J-Curve effects on both the aggregate as well as disaggregate level trade balance.

AB - This paper examines the effects of monetary policy and exchange rate shocks on the trade balance of Pakistan. These effects are further investigated on the two broad categories of trade surplus and trade deficit sectors. This study has employed the Structural Vector Error Correction Model (SVECM) with a long run and short run restrictions to identify the monetary policy shocks. The results from the SVECM are consistent with the standard theoretical expectations i.e. free from empirical puzzles. The findings have revealed that the trade balance deteriorates to the contractionary monetary policy shocks, providing support to the expenditure switching effects of monetary policy in Pakistan. Furthermore, the effectiveness of monetary policy is only limited to trade surplus sectors. On the other hand, the exchange rate shocks do not support the J-Curve effects on both the aggregate as well as disaggregate level trade balance.

KW - Exchange rate

KW - Monetary policy

KW - Pakistan

KW - SVECM

KW - Trade balance

UR - http://www.scopus.com/inward/record.url?scp=85040056014&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=85040056014&partnerID=8YFLogxK

M3 - Article

VL - 18

SP - 579

EP - 594

JO - International Journal of Business and Society

JF - International Journal of Business and Society

SN - 1511-6670

IS - 3

ER -