prefix: doi.org/10.52283/1.ajbmr |
Volume[01], Issue[03], 2011, C-02
THE IMPACT OF EXCHANGE RATE, FISCAL DEFICIT AND TERMS OF TRADE ON EXTERNAL DEBT OF PAKISTAN
A Cointegration and Causality Analysis
►Asma Awan, Nabeela Asghar and Hafeez ur Rehman
10.52283/NSWRCA.AJBMR.20110103A02
ABSTRACT
The massive debt burden of Pakistan calls for a detailed analysis of trends in the foreign debt levels, its causative factors and implications for economic growth. The present study is an attempt to analyze the relationship between external debt and exchange rate, fiscal deficit and deterioration of terms of trade for the period 1974-2008. Using Johansen approach, the study found significant long-run relationship between external debt and exchange rate and deterioration of terms of trade. The results of the study revealed that fiscal deficit had no significant impact on external debt. In the short-run all the variables failed to establish relationship with external debt. However, the existence of long-run causality was observed and three channels of uni-directional causalities were found actively running from (i) fiscal deficit to external debt, (ii) terms of trade to exchange rate, and (iii) fiscal deficit to terms of trade. Diagnostic test confirmed the validity of the model and CUSUM and CUSUMSQ test revealed the stability of the model.
Keywords: Foreign debt, Exchange rate, Fiscal deficit, Terms of trade.
A Cointegration and Causality Analysis
►Asma Awan, Nabeela Asghar and Hafeez ur Rehman
ABSTRACT
The massive debt burden of Pakistan calls for a detailed analysis of trends in the foreign debt levels, its causative factors and implications for economic growth. The present study is an attempt to analyze the relationship between external debt and exchange rate, fiscal deficit and deterioration of terms of trade for the period 1974-2008. Using Johansen approach, the study found significant long-run relationship between external debt and exchange rate and deterioration of terms of trade. The results of the study revealed that fiscal deficit had no significant impact on external debt. In the short-run all the variables failed to establish relationship with external debt. However, the existence of long-run causality was observed and three channels of uni-directional causalities were found actively running from (i) fiscal deficit to external debt, (ii) terms of trade to exchange rate, and (iii) fiscal deficit to terms of trade. Diagnostic test confirmed the validity of the model and CUSUM and CUSUMSQ test revealed the stability of the model.
Keywords: Foreign debt, Exchange rate, Fiscal deficit, Terms of trade.
