Estimating Long-run Trade Elasticity in Pakistan: A Co-integration Approach

Abstract

The analysis of this study is to monitor the effect of currency depreciation on trade elasticity, using co integration technique of ARDL. The Robust ARDL structure has been used to format the bound testing approach to co-integration model and error correction model. The bound test holds that there exists a long term stable relationship between BOP and its determining factors. The real GDP makes the balance of payment positive, both in long and short run. The study is based upon time series data (1974-2014). For estimation purpose, Johansen –Cointegration technique has been used and integration order has been applied for each variable before applying co-integration technique. This research actually seeks to examine the trade growth factors from period (1974-2014). The ARDL (autoregressive distributed lag model) examines the long run elasticity of trade. The shown technique has been collaborated through ADF test. All of the variables are incorporated at first difference i.e. I(1) accept one variable, which is GDP.ADF (augmented dickey- fuller) unit root test has been applied to examine the stationary time series data. Equation has been constructed for terms of trade and other independent variables to examine their long- run relation. ARDL shows that there is co-integration between trade growth and other independent variables i.e. GDP, CPI, NEER, NEER, IMP, EXP and also with the dependent variable TOT. Clearly, it can be noticed that the long- run relationship exists between these variables. It could be observed that “Marshal-Lerner condition” is true for Pakistan as well as for other underdeveloped countries.