The main idea of this present effort is to analyze the long-run relationship between Pakistan’s exports and imports by employing advanced techniques like Johansen-Juselius cointegration technique, and to study the short-run dynamics through Granger causality in the VECM framework. The empirical evidence reveals that Pakistan’s exports and imports show a long-run relationship. Thus, the short-run fluctuations between exports and imports will not sustain as in the long run, exports and imports will eventually converge towards an equilibrium state, but improving impact of exports on imports is less than unity in all cases. However, in the short run, causation runs from exports to imports and vice versa. The present endeavor may show a new direction to policy-making authorities.

Standard trade theory reveals that imports and exports are the product of relative resource endowments and consumer preferences. In relevant literature, this pioneering direction was discovered by Husted (1992) and Fountas and Wu (1999), to examine the cointegration between exports and imports of the US. Husted (1992) found evidence in support of a long-run relationship, while Fountas and Wu (1999) concluded with no long-run association between the two. Bahmani- Oskooee (1994), revealed that Australian imports and exports are cointegrated with cointegrating
coefficient very close to unity, indicating that indeed Australia’s macroeconomic policies have been effective in the long run. Bahmani-Oskooee and Rhee (1997) used quarterly data to model exports and imports of Korea and found evidence of cointegration empirically, with positive coefficient of exports. Arize (2002) utilized quarterly data for the period 1973-1998 for 50 OECD and developing countries to investigate the same query. He found that for 35 out of 50 countries, there was evidence of cointegration between exports and imports and 31 of 35 countries had a positive export coefficient. Arize’s result on cointegration for the US differs from that of Fountas and Wu (1999), but is consistent with the findings of Husted (1992).

However, compared to the latter, Arize (2002) found the export coefficient to be significantly different from unity. Similarly, Narayan and Narayan (2004) concluded that exports and imports for Fiji and PNG are cointegrated and suggested that for every one dollar acquired by exports, the imports increased by 0.78 cents approximately. Irandoust and Ericsson (2004), confirmed the existence of a long-run steady-state relationship betwen imports and exports. In case studies for Malaysia, Mohammad and Tang (2000), Tang (2003), Ahmad et al. (2003) and Choong et al. (2004) contributed additional empirical evidence on import-export cointegration, followed by Cheong (2005) and Tang and Mohammad (2005), who included Pakistan in their sample, but the results were inconclusive. The results of these studies were inconclusive, except for Cheong (2005)1, because they did not directly investigate the import-export relation and mostly employed the DOLS (Stock and Watson, 1988). Finally, elasticities approach reveals that imports and exports respond to income and price effects, but contrarily, domestic income increase was found to be associated with higher imports, while having no impact on exports (Senhadji and Montenegro, 1999; and Pacheco-Lopez and Thirlwall, 2006).

Applied Economics Journal, Macroeconomic Policies, Error Correction Model, Cointegration Analysis, International Business, ASEAN Economies, Time-Series Analysis, Applied Econometrics, Statistical Analysis, Gaussian Vector Autoregressive Models, American Statistical Association, Granger Causality.