Number of Downlaods: 12
Published Date: Sep 10, 1994
Devaluation and the Balance of Trade in Pakistan:A Policy Analysis (R-7)
Shahrukh Rafi Khan, SDPI
Devaluation is frequently recommended as part of structural adjustment programs for attaining external balance. Estimating export and import demand functions is the conventional method of evaluating the likely effect of a devaluation on the external balance. In this paper we address an important critique of the conventional method of estimating export demand functions and make a case for using real effective exchange rates rather than relative prices in the demand functions. We also demonstrate that high income elasticities in the conventional export demand functions need not be cause for concern. Using quarterly data, we find a modified version of a Marshall-Lerner condition barely satisfied for Pakistan, suggesting little or no positive effect on the external balance due to a devaluation. This finding is reinforced by disaggregate export demand functions.