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Title: |
Foreign Exchange Reserves and Impport Demand in a Developing Economy: the Case of Pakistan |
| Author: |
Arize, A. C., Malindretos, John & Grivoyannis, Elias C. |
| Author
Affiliation: |
Texas A & M Univ.-Commerce & Yeshiva Univ. |
| Source: |
International Economic Journal, June 2004, v. 18, no. 2, pp. 259-274 |
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Publication Date: |
June 2004 |
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Abstract: |
Conventional specifications of import demand in LDCs have commonly been plagued by implausible and unstable parameter estimates. This paper shows the importance of imposing long-run income homogeneity and of including foreign exchange reserves when estimating import demand function for an LDC. using several cointegration techniques, it is shown that there is one linear relationship among real imports, real income, relative import prices and real foreign exchange reserves. In addition, by employing stability tests for cointegrated systems by Hansen (1992), the paper shows that only when foreign exchange reserves and long-run unit-income homogeneity are accounted for does a constant parameter, long-run equilibrium relation emerge for Pakistan. Also, the ensuing short-run dynamic model is constant and data-coherent. Finally, the study provides information on the speed of adjustment to equilibrium and the median and mean time lags of adjustments of real imports to changes in their determinants. The results indicate a quick response of real imports to changes in their determinants. |
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