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香港作业：贬值和和巴基斯坦这样的国家之间的关系 这项研究找出了贬值和巴基斯坦这样的国家之间的关系，现在由于最新的全球经济状况，货币贬值是时髦词语。在货币方面，相对于黄金价格或其他国家的货币，贬值的目的是增加占一半以上政府收入的石油销售，而政府收入的价值大幅下降。通过货币贬值，政府代表赚取当地货币双收入，这可以导致更多的社会支出。政府官员也已经认识到，货币贬值可能会导致更高的通胀率，令人担忧的是，巴基斯坦目前的赤字，债务和支出都处于比在以前任何时候更高的危机水平。这么多的有毒资产已从资产负债表的银行转移向政府，现在不只是在这里，而是整个盎格鲁 - 撒克逊经济体 ，主权债务违约是一个重大的风险。 看来，要通过贬值货币的计划来解决赤字。 Relationship Between Devaluation And A Country Like Pakistan Economics Essay The research was carried out to find out the relationship between devaluation and a country like Pakistan, devaluation is buzz word now days due to latest global economy. Devaluation, a substantial drop in the value of a currency, relative to the price of gold or the currency of other countries, aimed to increase government revenue from oil sales, which account for more than half of government income. By devaluing the currency, the government stands to earn double the revenue in local currency, which could allow for more social spending. Government officials also had recognized that the devaluation would likely cause higher inflation, what is worrying was that Pakistan’s current deficits, debts and spending are all at far greater levels than during any of the previous crises. So many toxic assets have been transferred from the balance-sheets of banks to governments, that sovereign debt default – not just here, but throughout the Anglo-Saxon economies – is now a major risk. It seems that the plan to solve the deficit is through devaluing the currency. But Pakistan is on a long-term path of devaluation. Benefits of currency depreciation include temporary increase in manufacturing activity and employment, devaluation is an easy way out for politicians and economic managers who are often looking towards the next election, not the long-run health of the economy. When the rupee fell from Rs 62 to a dollar in June 2008 to Rs 80.7 on June 30, 2009 it was assumed that the worst is over. However, it dropped by another five per cent in the next six months to Rs 85 and the slide is still on. Economic experts pointed out that Pakistan is the only major country facing pressure on its currency. Indian rupee for instance appreciated by three per cent from Rs 47.78 against the dollar on July 1, 2009 to Rs 46.23 on January 22, 2010. Bangladesh taka was at Rs 68.87 on July 1, 2009 and is presently traded at Rs 69 against the dollar. The benefits of lower oil prices (from $140 per barrel to current $75 per barrel) have been absorbed by high rupee devaluation and have provided marginal relief to the consumers. The huge trade and current account deficits accompanied by heavy government borrowing are the main reasons for regular devaluation of the currency. Governments allow their currencies to be devalued through imprudent economic policies. Devaluation causes contraction in economic activities but promoted smuggling as black- market transactions in foreign exchange continue, massive devaluation of the rupee had encouraged brain drain from the country. People have accepted even lower salaries abroad because even from lower savings they could send more money in rupees to their dear ones in Pakistan. Pakistan would lose heavily both as seller and as a buyer. After officially devaluing the national currency the government announced a series of measures to increase the country’s exports, substitute its imports, boost electricity production, and combat price speculation, as purchasing frenzies sprung up in several major cities. The devaluation was necessary in order to “create a new economic order to give incentive to national production and steer away from dependence on imports and move further and further away from oil dependence. the dollar has not seen significant price fluctuations on the parallel market, although traders and public officials have tried to guess whether the government’s measures will create enough incentive to obtain government-issued dollars to push the parallel price down, as the government hopes, the losses from devaluation could be greater than the gains. Real income would decrease at the same level as the percentage of devaluation. The government was stimulating the economy through the budget deficit, but in order to do that, it was necessary to borrow funds. The influence of the state budget on the economy overall has grown significantly. In order to keep the volume of state orders at least at the same level, financial resources are required. Pakistan financial situation has stabilized after the last borrowing, but still in the regular international market it would be much, much more expensive for Pakistan to borrow than from the international lenders. The alternative, to borrow in the international market, is even more unpleasant, because then there would be higher interest rates and a more expensive credit service. If financial resources are not borrowed, then it becomes necessary to reduce the state budget deficit directly, or through the instrument of devaluation would bring about great changes in the economy, which would stimulate activity and growth in certain sectors. Continuing downslide of the rupee had almost halted economic growth in the country, badly hitting all the important areas of economy from agriculture to industry; manufacturing to import of goods; IT sector to students studying abroad for higher education apart from increasing country’s foreign debt servicing liabilities, the rupee had fallen more than 25 percent from May 2008 to December 2009 putting a negative impact on the economy and adversely affecting all sectors including business and consumers. If the government could not take action to control the depreciation of the currency, people would soon face a new wave of dearness and price hike, depreciation of the rupee will also multiplying the cost of doing business and badly hitting industrial, manufacturing and agriculture activities as Pakistan has to import fertilizers, food items and industrial raw material. Only the import of petrol had witnessed an increase of 274 percent in November to December 2009 as compared to the same period of last year due to low refineries production and reduced availability of CNG. If this trend continued, the rupee would come further under pressure as the country was experiencing falling exports and rising imports. Continuous power and gas suspension to the industry had squeezed the possibilities of producing export surpluses due to which the country might face a decline in foreign exchange earnings in coming days, which would further plunge the rupee down. Therefore the government must devise a comprehensive strategy to overcome power problems and increase exports. One solution of enhancing exports was to encourage investment. Many sectors of the economy including power offer great opportunities for local and foreign investors and the government should take all possible measures to ensure complete security as investors need absolute security of their capital. General factors leading to devaluation, persistent adverse trade balance and disequilibrium in balance of payment are the main causes, which compel a country to devalue its currency. Problem Statement The problem was to analyze the impact of devaluation on economy. The thesis shows a causal relationship between effects of devaluation capacity utilization (output) during stabilization in Pakistan having significant negative effect on output. 1.3 Hypotheses Hl: devaluation is significantly linked to real exchange rate. H2: devaluation in one year will cause devaluation in forth coming years. 1.4 Definitions Devaluation. Reduce the official value of (a currency) in relation to other currencies: Exchange rate. The value of one currency for the purpose of conversion to another Capacity utilization rate. The percentage of a company's, industry's or country's production capacity which is actually used, over some period of time also called operating rate. CHAPTER2: LITERATURE REVIEW Applegate (1990) Devaluation was suggested for Zambia by IMF because the foreign exchange will be used on works that had more return to improve export over import, the long run impact will raise real output and employment. The outcomes of empirical studies had been uncertain with some result in a positive impact of devaluation whereas others wind up opposite. Edwards, found that devaluations compact output in the short run, improved output after one year, but were neutral in the long run. The contractionary effects of devaluation, if present, are dependent on structural rigidity in the economy. Thus, they are more likely to be present in the short run than the long run. Krugman and Taylor mention that devaluation should be considered as a measure designed to correct balance of payments problems in the average rather than the short run. The extent and course of the impact of devaluation depend mostly on the extent of replacement of domestically created inputs for imported inputs and domestic labor for imported capital. Since Zambian industry was greatly dependent on imported intermediate inputs and capital, was operating at less than full capacity. That entail that increases in real output can be obtained in the short run without capital investment. Long-run growth depends on either further import of capital goods, which persist to be limited by a harsh shortage of foreign exchange, or replacing other inputs for capital and highlighted less-capital-intensive sectors. First, almost all government borrowing is from the central bank resulting in the lack of alternative markets for government debt. This involve that government deficits mechanically increase the money supply. Second, markets for equities and commercial paper are non present, forcing that firms must finance fixed and working capital by short-term bank credit or retained earnings. A third option for firms was to obtain loans from the "unofficial money market. The magnitude and direction of the effect of devaluation on real GDP depend on several factors, first, in percentage terms; the absolute magnitude of the effect of devaluation on real GDP is less at higher initial values of the exchange rate. Second, the greater the trade deficit the smaller becomes the impact of devaluation on real GDP until it eventually becomes negative.#p#分页标题#e# Reinhart (1995) in the majority devaluation events the real exchange rate does in fact respond significantly to a nominal exchange rate shock, at least in the short run. The real effects in continual high-inflation countries become visible to be much less, there are major real effects one year after the devaluation; the effects, seemed to erode completely beyond the third year. In low inflation economies with a practice of a fixed exchange rate, the real effects of the devaluation may be even longer-lived. Once the time-series characteristics of the variables are properly taken into account in the estimation, there is little proof that relative prices had a significant and predictable impact on trade. May suggest that a fruitful area to investigate is intra-developing country trade. Second, it is found that, for the common of cases, relative prices are a significant determinant of the demand for imports and exports. Third, while relative prices have an expected and efficient impact on trade, price elasticities have a tendency to be low, in most instances well below unity. The latter suggests that large relative price swings are required to have a significant impact on trade patterns. While industrial country income elasticities are well above their developing country Asian and Latin American counterparts Sen (1996) the suggestion of a non-expansionary devaluation is better than contractionary monetary and fiscal policies unnecessary for devaluation to 'stick', because investments in traded goods sector slow down move to the latest and more export oriented economic structure bringing with it 'ex-change rate adjustments'. One reason of devaluation is the presence of primary balance of trade deficit. A good devaluation is expansionary if not checked will decrease the initial positive effect of the devaluation.' the contractionary policies are planned to include domestic inflationary tendencies, so that enough time is available for resources to pour into the traded goods sectors in response to the devaluation-induced growth in the comparative price of traded to non-traded goods. Richard Cooper’s devaluation from an early position of deficit is likely to be contractionary as a result of the initial trade 'disequilibrium', and no other requirement is required. Fleming (1978) the impact of inflation on Tort Compensation in some periods the rate of devaluation had been unusually high and quite clear of all reasonable expectation, producing the difficulty especially of long-term creditors who have no means of cutting their losses. Eichengreen and Irwin Working (2009) countries devaluate and gain competitiveness at their expense, resorted to protectionist policies to strengthen the balance of payments and limit gold losses. an independent monetary policy addressed the deepening slump, used trade restrictions to shift demand toward domestic goods and stemmed the rise in unemployment In contrast, countries that discarded the gold standard, let their currencies to depreciate, saw their balances of payments fortify Countries abandoning the gold standard early, as Britain experienced comparatively mild recessions and quick recoveries. Countries lingering on the gold standard, such as France experienced prolonged fall. Countries send-off the gold standard were able to loosen up monetary policy, while countries staying on gold were forced to keep up tight monetary policies that reserved recovery. The German government depended on foreign loans to finance its expenditures, and the freshening up of those loans caused a run on the mark and a loss of gold reserves. The government was forced to impose strict controls on foreign exchange transactions. That meant that devaluing would have had devastating effects on the public finances. Reinhart, Carmen, Kaminsky, Graciela and Vegh (2002) the devaluation of a currency or a declaration of default, are capable of starting an immediate unfavorable chain reaction among countries in a region and in some cases across regions. The impact of these shocks on the countries usually included sharp declines in equity prices, an increase in the cost of borrowing in international capital markets, and a significant drop in the availability of capital. A devaluation in a given country makes it costly (in terms of a loss of competitiveness and output) for other countries to retain their parity. In this setting, devaluation in a second country is a procedure decision whose effect on output is expected to be useful. Thus an observation a high volume of trade among the “synchronized” devaluers. Connolly and Taylor (1976) devaluation, raises domestic prices and as a result increases the demand for money, thereby leading to a temporary improvement in the balance of payments. The rate of devaluation is calculated as the percentage increase in the local currency price of the dollar. With following character: 1. Export and import prices increase very a little preceding to devaluation at about the similar rate, but wholesale and consumer prices increase at a faster but nearly identical rate. 2. In the year subsequent devaluation, the prices of exports and imports rise significantly, whereas consumer and wholesale prices increase at a faster rate than before but at a slower rate than the prices of traded goods. 3. During the second year after devaluation, all prices rise at about the same rate. 4. Over the entire 2-year period after devaluation, the prices of exports and imports rise at a bigger rate than wholesale and consumer prices, and this increase in the relative price of traded goods was enough to cure the relative decline in their price preceding devaluation. Devaluation in developing countries emerges to be quite flourishing in improving payments imbalances; it frequently serves the second purpose of dismantling exchange controls. The level to which devaluation is thriving depends in large part upon the monetary policy practice along with the change in the exchange rate. The related fact that exchange controls are frequently relaxed following devaluation, Pastine (2000) the system has any reason to try to expect an expected hit by devaluing before it happens. Speculators will attempt to forecast this defensive devaluation and use it through their foreign currency purchases. In equilibrium, the central bank will intentionally introduce uncertainty about the timing and size of the devaluation, making it difficult for speculators to guess the conditions under which it will alter the exchange rate policy, the central bank can evade a speculative attack. This move before not analyzed. It means that exchange rate uncertainty is in actuality an important aspect of fixed exchange rate system. Exchange rate uncertainty will be established endogenously and intentionally by the monetary authorities in an effort to avoid speculative attacks. This sanction an investigation of finest devaluation policy in the countries without perfect capital controls. The model has a constraint which confines some types of capital controls, and it is revealed that with tough enough capital controls the stability collapses to a rule for the central bank, as in Flood and work with ideal capital controls. However, with less difficult capital controls the equilibrium will be qualitatively unlike as the central bank actively tries to evade speculative attacks. Himarios (1987) Argue that exchange rate effect and control inflation rate prices increase to some percentage of devaluation to bring equilibrium in value, only if nominal and real prices are flexible; can face resistance from some factors of production. The effects of devaluation on the price level are felt for at least three years while adjust exchange rate, devaluation is considered inflationary. In the long run, domestic prices rise by the full amount of a devaluation. The active response of prices to exchange rate changes through wage-price dynamics. Wage-price linkages are such that in the long run the system is fully neutral the predicted '"longer-run consequences" should occur within a time horizon of two or three years'. If, in contrast, devaluation is start from a position of disequilibrium i.e. a unclear set of relative (traded to non-traded, domestic to foreign) prices-its efficiency should be judged by whether it help or delay the process of adjustment towards stability. If devaluation is broadcast quickly and to the full level into domestic prices, not only is it hopeless as a stabilization tool, but it may even be measured destabilizing since it introduces extra unnecessary shocks to the adjustment course. If devaluation is predictable or delays and with changes made in monetary and fiscal policy will elevate current wage demand, level of current price, inflationary pressure, hence real exchange rate will overvalue and horrible effect on trade balance as hording up of importable goods for more capital gain. Countries (Finland, Ghana, India, Israel and Spain) devaluations were either over forecasted and/or had been anticipated for a period of two (Spain, Israel) to five years (Finland, Ghana, Spain) before the actual devaluation occurred. The ex post effects of devaluation on the price level are stretched out in most cases over a period of three years. The first-year result appears to be relatively small (roughly one-third) in contrast of with the cumulative effect. 2. Countries investigated are a devaluation fully reflected into prices within three years. 3. There is an extensive variety of experiences among countries that have experienced single or multiple devaluations. At one end of the spectrum, devaluation had an insignificant long-run effect on the price level; at the other end, devaluation raised the price level by a corresponding amount. 5. When devaluation is predictable, it has major effects on the price level even before it is made successful. Child (1968), the rupee remains overvalued, and exchange control continues to defend the balance of payments. The main reason was being promotion of saving, investment, and economic growth through (1) controlling the volume, composition, and terms of international transactions according the limits compulsory by market conditions-and (2) changing the domestic structure of prices, share of resources, composition of output, and distribution of income. Pakistan's control system is broad complex, and discriminatory based on goods being traded, effective import rates of exchange, for export permitting taxes and subsidies, the lowest effect rate for agricultural exports and more manufacturing get highest effective rates, plus payment of effective rates is different. The State Bank should set up subordinate that limit imported goods exchange rate under aid or barter contract as some get exporters get bonus vouchers, reduce uncertainty in foreign trade because of unpredictable exchange rates. When the importer makes his purchase, the government receives revenue equal to the rupee cost of the goods (at the official exchange rate) and incurs an equal dollar debt (at the official rate). (b) Scheduled banks are given "subauthorizations" against which to issue letters of credit for aid-eligible merchandise. A merged market would require a single bonus voucher price; barring the unlikely case in which the effective rates of exchange are equal in the two separated markets, a unified price would create an inequality between aid flows and aid imports, i.e., the accumulation of unutilized aid (or the misuse of aid) or the import of expensive aid-type goods against Pakistan's own foreign exchange earnings. Since accumulation of unutilized aid funds is undesirable, since Pakistan should not buy expensive, aid-subsidized goods with its own foreign exchange earnings, and since country-discriminating regulatory duties are contrary to international agreements, the continuing practice of tying aid gives Pakistan no alternative to the maintenance of a separate market for aid goods.#p#分页标题#e# Edwards and Montiel (1989) devaluation shock, following adjustment the required degree of overshooting of the macro variables will be magnified by postponement. the effects of the timing of change is that the practical pattern of continuously rising black market premiums, rising inflation, and increasing current account deficits can be definitely inferred only in the circumstance of adequately postponed adjustment. The suggestion is that "devaluation crisis" episodes in developing countries have resulted not from the occurrence of domestic or external shocks, but from a disappointment to adjust quickly in response to such shocks. The vast majority of devaluation crises have been lead by loose and incompatible macroeconomic policies. In particular, the evidence shows that fiscal policy in the devaluing countries as a group was significantly more expansive than in a control group of fixers. A significant worsening in the international terms of trade immediately before the crisis. Some collapses may have been caused by exogenous external shocks. In the period prior the devaluations a major real exchange rate appreciation; the reduction of the stock of international reserves; a decline of the current account deficit; and a decease in the ratio of net foreign assets to money. Devaluation crises have been followed by very sharp increases in the black market premium. Immediately following the devaluation the premium experienced a significant decline. For real wages, the facts is less clear. In some countries, real wages may have followed an inverted-U path. They improved in the years previous the crisis and dropped in the years that followed. This relationship between the timing of the devaluation and its magnitude is not linear. If the rescheduling period is doubled, the required scale of the devaluation will not double. "Devaluation crisis" episodes in developing countries have resulted not so much from the occurrence of domestic or external shocks, but from a failure to alter punctually in response to such shocks. Zaidi (1995) there is necessitate for devaluation because of the broadening of the trade gap, the decrease of foreign exchange reserves and the increasing inflationary pressures, the recent devaluation of the Indian rupee. The trade and current account deficits have both been diminishing over the last few years. The trends for the two deficits, which are very strongly associated to the exchange rate, have been decreasing, foreign exchange reserves have been increasing constantly. Inflation rising and has affected the real exchange rate, which evaluate the inflation rate in exporting and importing countries. A high inflation in one trading country against the other involves a declining real exchange rate and thus the requirement to devalue the nominal exchange rate to make goods more aggressive. Devaluation for Pakistan would prove to be inflationary and worsen further an already explosive price situation Bahmani-Oskooee and Hegerty (2007) the volume of trade will be reduced. While risk-aversion amongst traders might discourage the volume of a country’s exports, ideal forward markets might decrease this effect. Forward markets may not be adequately developed, and traders may still be uncertain of how much foreign exchange they want to wrap. Increased exchange-rate instability might have the conflicting effect and amplify the volume of trade. Under very broad conditions, a firm might gain from increased instability and thus increase the volume of its exports. Also shows that instability can increase trade, as it enlarge the probability that the price a trader receives might surpass trade costs. Hypothesize that increased volatility increases the worth of exporting firms, thus encouraging exports. Use an asset-market approach to explain a positive effect. Volatility increases the value of a trader’s choice to export; since this risk increases the possible gains from trade, the volume of trade will raise accordingly. An argument put forward by the antagonist of the floating exchange rates is that such rates bring in uncertainty into the foreign exchange market, which could discourage trade flows. Mendoza (1995) terms-of-trades hocks account for nearly 1/2 of actual GDP variability. 1) Terms-of-trade shocks are huge, determined, and weakly procyclical. 2) Net exports-terms of trade correlations are low and positive, and independent of terms-of-trade autocorrelations. 3) Cycles are larger in DCs, but all countries have similar variability ratios, autocorrelations, and GDP correlations. 4) Real exchange rate fluctuations are large and procyclical. Minot (1998) devaluation increase the manufacture of tradable goods and decrease demand of it, results in contraction of economy increase in inflation and in effective in subordinate external deficit. The distributional impact of devaluation effect more to household that consume more imports than, fewer consumers of goods. Similarly devaluation has negative impact on urban than rural household. Within each sector, more adverse impact on high-income than on low-income households as rural and poor income people has less input in economy. The results would be less applicable where a significant portion of the poor are wage-earning employees, such as countries with a large plantation sector. In cases where the staple is tradable, the net sales position of poor households in rural areas becomes a critical issue. Lewis, Jr. and Guisinger (1968) the most important adjustment made was to take description of import quotas, redundant tariffs, multiple exchange rates, and other factors which kept tariff from being the one and only or even the principal, Introducing direct price comparisons for inputs and for output increased markedly the average levels of safety afforded by the tax, exchange rate, and control systems taken together, though the levels of protection on some very important industries, such as cotton textiles, fell. After adjusting for price evaluation and allowing for overvaluation of the domestic currency, the weighted average of industries still had over two-thirds of value added "due to" security of various sorts. Other facts suggest that most of this takes the shape of very high profits relatively than inefficient input use. Some industries were well over the average, a number with levels of defense implying that value added in the industry was negative "at world prices”. The position of industries by level of protection also changes when direct price comparisons are used, largely due to the extensive rise in protection from import restrictions on "low tariff" industries. 2. The exact levels of effective protection are quite responsive to the treatment of non-traded inputs, caused a substantial fall in the measured level of protection (at the existing exchange rate) for every industry, and dropped the average level from over 90 per cent to 60 per cent of value added "due to" protection. 3. It is comparatively easy, even when there are non-traded inputs, to create some adjustment for the degree of overvaluation of the currency, slightest to have some source other than the official exchange rate for comparison. 4. Using an alternate of the measure of effective protection, one can array industries by the price of foreign exchange at which the industry would be receiving zero protection. Trade-restricting policies in Pakistan have led to a set of domestic prices that differ widely from the prices that continue in international trade. As a result, resource allocation even in chief industries, such as textiles and food products, may be poorly out of line with what it should be. Pakistan in the past decade had stirred away from many trade-distorting policies, but a great deal remains to be done in order to get domestic users of tradable goods to face prices that more fully imitate the opportunity cost of such goods to the country and to minimize the wastes of industrial investment decisions. Palyi (1938) rising prices of commodities and stocks, by growing volume of production, inventories and turnover, as 15 billion dollars of new deposits, the apparent restoration of bank and business liquidity, dedicatory expenditures, de-valuation and the consequent trebling of the gold reserves, together with a whole system of price-raising and price-fixing policies -until all these succeeded in stimulating on a major scale the revival of investment, speculation, and new business ventures. The new doctrine promulgated insisted on the stability of prosperity, rather than on its continued rise; on a high rate of employment of productive factors rather than on high prices for products; and on the distributive aspects of the economic growth rather than on the growth itself. Higher prices tend to carry into higher wages, thereby forcing further price rises. Other methods had to be used or threatened, which promised to limit the future expansion of the credit structure, but not to deflate it be-yond the point compatible with the maintenance of cheap money rates. CHAPTER3: RESEARCH METHODS 3.1 Method of Data Collection Since devaluation measured as capacity utilization which is not usually measured therefore the availability of the data could had been a constraint but the issue was resolved by applying the formula to calculate capacity utilization. The data is based on thirty years starting from 1979 till 2009, collected from SBP’s, Federal Bureau of Statistics’ website. For the purpose of data collection the research was based on two variables but mostly upon capacity utilization. 3.2 Sample Size A sample size of 30 cases was used, containing a dependent variable and an independent variable. 3.3 Statistical Technique For the purpose of data collection the research was based on two variables. Regression analysis and autocorrelation were carried out keeping in view the nature of the hypothesis and the data.#p#分页标题#e# The output showed that 14 years lag data was run with autocorrelation function and the result was that from year 1 to 7 the p value is significant that is less than 0.05. thus if in Pakistan devaluation occurred in a single year its effect will be carried over for next 7 years unless no further devaluation has occurred in between. Foreign-exchange rates only cannot verify competitiveness. Pakistani inflation rate with other countries need to be considered. A currency can be destabilized, but the benefit could then be compensated by high inflation. The variation between the unofficial and official exchange rate was increasing dollar demand while promoting smuggling due to government imposed tax on imports and no control on black market economy, is proved by the increasing gap between the US dollar open market rate and the interbank rate, this devaluation affect will be felt for the next seven years on economic factors like inflation, fiscal deficit, circular debt, interest rate, taxes. Government has to find a way of guide this undocumented money so that it can contribute to fiscal spending and private sector financing and so help to decrease Pakistan's reliance on donors and to recover economic self-reliance, by making efforts to encourage official domestic savings, which have decline by 6.5 percentage points to 14.3% of gross domestic product (GDP) in the past six years, would help the government stop its deficit and provide desired liquidity to the private sector. The country's central bank has reserved interest rates high to attract savers' money, keeping its key policy rate at 12.5% in its Monetary Policy Statement for February and March, with a view to keeping inflation in check. The central bank last cut its discount rate in November, by 50 basis points. The high interest rate has not barred the rupee, which lost 23% against the dollar in 2008, and declined 3.5% in the last six months of 2009, from continuing to devalue against all major currencies on a day-to-day basis. The currency is also devaluing in spite of a central bank anticipate that foreign exchange reserves will reach US$15 billion by the end of June, elevated foreign exchange reserves are usually a positive for the exchange rate. Exchange rate constancy is also essential for growth in per capita income. 5.2 Implications and Recommendations This section will discuss the presentation of the results and the implications on the capacity utilization and its relationship with the independent variable. The regression does a good job of modeling capacity utilization as the result show that real exchange rate when devaluated in any time of the year will bring a decrease around 86% in capacity utilization of Pakistan each year, the autocorrelation function proves that this devaluation in one year will has its effect for the consecutive seven years, thus the capacity utilization will keep on decreasing or tapering for the coming years or until unless no further devaluation occurs in between. 5.3 Future Research Early empirical studies relied on simple methods such as Ordinary Least Squares to evaluate the effects of exchange rate volatility, but the paper according which the research is carried out followed 2sls technique, incorporating distributed lags to capture dynamic effects. As time series analysis, rather than simple regression, became more popular, co-integration analysis were introduced to time-series econometrics, economists were able to avoid many of the problems – such as “spurious correlations” – created by relying on an overly simple technique such as OLS. Thus, the progressive refinement of econometric technique is apparent. Future research on capacity utilization dealing with the determinants like trade flows can be explained based on gravity models and those based on income and substitution effects Future research that concentrates on introducing new measures of volatility or refining the existing measures, are recommended. Second, certain modifications of the determinants of trade flows, such as incorporating third-country effects, also have not been incorporated in the majority of studies. Thus, simplified models are most common, often using income, relative price, and exchange rate volatility as determinants. Because of foreign exchange controls in many less-developed countries, there is a black market for foreign currencies in these countries, the only co-integration and error-correction method that allows some of the variables to be non-stationary and some to be stationary is the bounds testing approach by Pesaran (2001) it is highly recommended that future studies rely on these method. It should be indicated that the other advantage of the bounds testing approach is that the short-run and the long-run effects of exchange rate volatility on trade flows could be assessed simultaneously, using one model specification. Considering the autocorrelation function output, the autocorrelation model can also be used to measure the impact of devaluation for the next 7 years on Pakistan economy. Although both models like regression and autocorrelation are of substantial empirical and analytical interest, therefore are models for future research. 5.4 Conclusions To begin the conclusion section, it must be stated that to make interpretations on the results of the analysis of this data is somewhat problematic due to the small sample size. It is unfortunate for the realm of academia and we may expect a number of years to pass before a really significant study can be found. Some doubt is cast upon the generalization of these results given the large sized Pakistani economy. This perhaps defends the validity of the data somewhat against the doubt cast by the small sample size. Of course, one need not be too pessimistic and opine that perhaps this study was performed to soon. This paper concludes by saying that capacity utilization that espouses more flexible-oriented values do not enjoy exchange rate advantages. |
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