Long-Run Relationship between Exports and Imports of Pakistan

The present study investigates dynamic relationship between exports and imports of Pakistan by using fiscal year data from1948-49 to 2012-13. ARDL co-integration technique has been employed to estimate the relationship and from empirical results, it is concluded that exports and imports are indeed co-integrated or in other words, long run equilibrium relationship does exist between exports and imports of Pakistan. It is further concluded that Pakistan is not violating its international budget constraints. VECM estimation also confirms that exports and imports are co-integrated and coefficient of error correction term indicates that in case of any departure from equilibrium exports adjust back at the speed of 17.147 percent of its last year disequilibrium value and it takes 5.832 years to fade away any impact caused by short term trade imbalances. Results obtained by Toda and Yamamoto (1995) test indicate that bi-directional causal relationship also exists between exports and imports of Pakistan. Findings of the current study has very important implications for policy makers to design such macroeconomic policies that can lead to establish long run equilibrium relationship between exports and imports adjusting short term trade deficit shocks to avoid violation of international budget constraints.