THE ASYMMETRIC IMPACT OF RER-MISALIGNMENT ON ECONOMIC GROWTH: AN APPLICATION OF HODRICK–PRESCOTT FILTER TECHNIQUE

Abstract

Previous studies that examined the impact of exchange rate misalignment on economic growth were based on the symmetric approach where both overvalued and undervalued exchange rates were supposed to affect the economic growth in a similar way. However, in recent years, a number of studies have established that exchange rate changes affect the trade flows in an asymmetric way. Hence, this study investigates the asymmetric effect of exchange rate misalignment on the economic growth of Pakistan. The findings of the study indicate that in the case of the symmetric approach, exchange rate misalignment has a negative impact on economic growth. However, after applying the nonlinear ARDL approach, the study finds significant evidence in favor of the asymmetric effect of exchange rate misalignment on economic growth. Interestingly, the results indicate that undervaluation spurs while over-valuation hampers the economic growth in Pakistan. The study recommends that though under-valued exchange rate may have temporary relief for the economy, yet in the long run, a market-based equilibrium exchanger rate is imperative for a developing economy like Pakistan.