Trade Balance Response to Shocks in Monetary Policy and Exchange Rate: Evidence from Pakistan using SVECM Approach
This paper examines the effects of monetary policy and exchange rate shocks on the trade balance of Pakistan. Theseeffects are further investigated on the two broad categories of trade surplus and trade deficit sectors.Thisstudy has employed the Structural Vector Error Correction Model (SVECM) withalongrun and short run restrictions to identify the monetary policy shocks. The results from the SVECM are consistent with the standard theoretical expectationsi.e. free from empirical puzzles.The findings have revealed that the tradebalance deteriorates to the contractionary monetary policy shocks, providing support to the expenditure switching effects of monetary policy in Pakistan. Furthermore, the effectiveness of monetarypolicyis only limited to trade surplus sectors.On the other hand, the exchange rateshocks do not support the J-Curve effects on both the aggregate as well as disaggregate level trade balance.
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