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The output showed that 14 years lag data was run with autocorrelation function and the result was that from year 1 to 7 the p value is significant that is less than 0.05. thus if in Pakistan devaluation occurred in a single year its effect will be carried over for next 7 years unless no further devaluation has occurred in between. Foreign-exchange rates only cannot verify competitiveness. Pakistani inflation rate with other countries need to be considered. A currency can be destabilized, but the benefit could then be compensated by high inflation. The variation between the unofficial and official exchange rate was increasing dollar demand while promoting smuggling due to government imposed tax on imports and no control on black market economy, is proved by the increasing gap between the US dollar open market rate and the interbank rate, this devaluation affect will be felt for the next seven years on economic factors like inflation, fiscal deficit, circular debt, interest rate, taxes. Government has to find a way of guide this undocumented money so that it can contribute to fiscal spending and private sector financing and so help to decrease Pakistan's reliance on donors and to recover economic self-reliance, by making efforts to encourage official domestic savings, which have decline by 6.5 percentage points to 14.3% of gross domestic product (GDP) in the past six years, would help the government stop its deficit and provide desired liquidity to the private sector. The country's central bank has reserved interest rates high to attract savers' money, keeping its key policy rate at 12.5% in its Monetary Policy Statement for February and March, with a view to keeping inflation in check. The central bank last cut its discount rate in November, by 50 basis points. The high interest rate has not barred the rupee, which lost 23% against the dollar in 2008, and declined 3.5% in the last six months of 2009, from continuing to devalue against all major currencies on a day-to-day basis. The currency is also devaluing in spite of a central bank anticipate that foreign exchange reserves will reach US$15 billion by the end of June, elevated foreign exchange reserves are usually a positive for the exchange rate. Exchange rate constancy is also essential for growth in per capita income. 5.2 Implications and Recommendations This section will discuss the presentation of the results and the implications on the capacity utilization and its relationship with the independent variable. The regression does a good job of modeling capacity utilization as the result show that real exchange rate when devaluated in any time of the year will bring a decrease around 86% in capacity utilization of Pakistan each year, the autocorrelation function proves that this devaluation in one year will has its effect for the consecutive seven years, thus the capacity utilization will keep on decreasing or tapering for the coming years or until unless no further devaluation occurs in between. 5.3 Future Research Early empirical studies relied on simple methods such as Ordinary Least Squares to evaluate the effects of exchange rate volatility, but the paper according which the research is carried out followed 2sls technique, incorporating distributed lags to capture dynamic effects. As time series analysis, rather than simple regression, became more popular, co-integration analysis were introduced to time-series econometrics, economists were able to avoid many of the problems – such as “spurious correlations” – created by relying on an overly simple technique such as OLS. Thus, the progressive refinement of econometric technique is apparent. Future research on capacity utilization dealing with the determinants like trade flows can be explained based on gravity models and those based on income and substitution effects Future research that concentrates on introducing new measures of volatility or refining the existing measures, are recommended. Second, certain modifications of the determinants of trade flows, such as incorporating third-country effects, also have not been incorporated in the majority of studies. Thus, simplified models are most common, often using income, relative price, and exchange rate volatility as determinants. Because of foreign exchange controls in many less-developed countries, there is a black market for foreign currencies in these countries, the only co-integration and error-correction method that allows some of the variables to be non-stationary and some to be stationary is the bounds testing approach by Pesaran (2001) it is highly recommended that future studies rely on these method. It should be indicated that the other advantage of the bounds testing approach is that the short-run and the long-run effects of exchange rate volatility on trade flows could be assessed simultaneously, using one model specification. Considering the autocorrelation function output, the autocorrelation model can also be used to measure the impact of devaluation for the next 7 years on Pakistan economy. Although both models like regression and autocorrelation are of substantial empirical and analytical interest, therefore are models for future research. 5.4 Conclusions To begin the conclusion section, it must be stated that to make interpretations on the results of the analysis of this data is somewhat problematic due to the small sample size. It is unfortunate for the realm of academia and we may expect a number of years to pass before a really significant study can be found. Some doubt is cast upon the generalization of these results given the large sized Pakistani economy. This perhaps defends the validity of the data somewhat against the doubt cast by the small sample size. Of course, one need not be too pessimistic and opine that perhaps this study was performed to soon. This paper concludes by saying that capacity utilization that espouses more flexible-oriented values do not enjoy exchange rate advantages. |
