Assessing long- and short-run dynamic interplay among balance of trade, aggregate economic output, real exchange rate, and CO2 emissions in Pakistan

Since the open economy macroeconomic indicators such as the balance of trade and exchange rate interact with the economic and environmental indicators, it is worthy of delving into their interactive linkages. This study investigates the long-run and short-run dynamic interactive links among the balance of trade, aggregate economic output, real exchange rate, and carbon dioxide (CO 2 ) emissions in Pakistan. Bayer and Hanck’s combined cointegration and the auto-regressive distributed lag method are applied on annual time-series data from 1970 through 2018. The key findings are: (1) Balance of trade and real exchange rate imparted the CO 2 emissions mitigation influence in both the long run and the short run. In contrast, the aggregate economic output exhibited the CO 2 emissions driving influence in the long run and short run. (2) Balance of trade and real exchange rate induced enhancing and impeding influence on aggregate economic output, respectively, in the short run. However, they exposed the aggregate economic output strengthening influence in the long run. Besides, CO 2 emissions produced a neutral influence on the aggregate economic output in the short run, whereas it put forward the aggregate economic output hampering influence in the long run. (3) Aggregate economic output revealed a balance of trade improvement influence for both the long run and short run. Nevertheless, the real exchange rate showed the balance of trade deterioration (improvement) influence in the short run (long run), confirming the J-curve hypothesis in Pakistan. Furthermore, (a) a bidirectional causality existed between CO 2 emissions and aggregate economic output, and balance of trade and aggregate economic output. (b) A unidirectional causality existed from real exchange rate to balance of trade and aggregate economic output, and from the balance of trade and real exchange rate to CO 2 emissions. The diversification of exports and energy mix is recommended to improve the balance of trade, economic aggregates, and environmental sustainability. Graphic abstract