The Impact of Exchange Rate on Output Level: Bounds Testing Approach for Pakistan

Currency depreciation has been an influential instrument to boost-up the net export of the developing economies that face the strict conditions of international donors along with elevated trade deficit. The eventual intention behind this channel is to achieve the improved current account status that result in higher output level. But the output growth may be dwindling in long-run that may not allow the traditional channel to work. This study examines the given analysis by utilising the annual data set over the period 1972-2010 for output, nominal exchange rate and price level along with different control variables in case of Pakistan. The findings based on Bound-testing approach to auto-regressive distributive lag model (ARDL) indicates that traditional theories do not work in long-run and currency depreciation may lead to reduction in output while the short-run Error-Correction Model (ECM) results robustly support to the traditional theories of open economy macroeconomics in which currency depreciation increases the output level. The study explores the new dimension of research both for policy-maker and international donors working in developing countries, particularly in South Asian region.