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AN ANALYSIS OF EXCHANGE RATE CHANGES ON FOREIGN AID IN PAKISTAN

Keywords: Exchange Rate , Foreign Aid , Co-integration , Error Correction Mechanism , Pakistan

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Abstract:

This article investigates the long run and short run effect of exchange rate changes on foreign aid of Pakistan by applying unit root and cointegration analysis. The data set includes annual observations for the period 1973-2010. Moreover, this study examines four alternative but equally plausible hypotheses, each with different policy implications. These are: i) foreign aid cause Real Exchange Rate (the conventional view), ii) Real Exchange Rate cause foreign aid, iii) There is a bi-directional causality between the two variables and iv) Both variables are causality independent (although highly correlated). The empirical evidence findssignificant positive relationship between exchange rate changes and foreign aid in long run, as well as in short run. Both in the long and short run, foreign aid is affected by exchange rate changes.

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