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Does an exchange rate depreciation improve the trade balance of Pakistan?

Author

Listed:
  • Muhammad Omer

    (State Bank of Pakistan)

  • Junaid Kamal

    (State Bank of Pakistan)

  • Jakob Haan

    (University of Groningen
    CESifo)

Abstract

We investigate the impact of an exchange rate depreciation on Pakistan’s trade balance, using data for 1968–2019 in a simultaneous four equations model estimated by GMM. Our results suggest that a real exchange rate depreciation decreases imports and increases exports. However, as exports are also affected by imports, a real exchange rate depreciation not only has a depressing effect on imports but also on exports. The income elasticity of imports is high. Our findings imply that the Marshal–Lerner Condition does not hold for Pakistan. Moreover, we find that trade liberalization and the country’s nuclear ambitions impacted Pakistan’s trade balance.

Suggested Citation

  • Muhammad Omer & Junaid Kamal & Jakob Haan, 2023. "Does an exchange rate depreciation improve the trade balance of Pakistan?," International Journal of Economic Policy Studies, Springer, vol. 17(1), pages 163-185, February.
  • Handle: RePEc:spr:ijoeps:v:17:y:2023:i:1:d:10.1007_s42495-022-00096-3
    DOI: 10.1007/s42495-022-00096-3
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    More about this item

    Keywords

    Pakistan; Marshal–Lerner condition; Trade balance; Real exchange rate;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F24 - International Economics - - International Factor Movements and International Business - - - Remittances
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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