Relationship Between Trade Balance and Real Exchange Rate (Marshal Lerner Condition): Evidence from Pakistan

Abstract

The study analyzed the Marshal Lerner Condition implementation in Pakistan from the year 1961 to 2013, data gathered from the State Bank, World Bank and IMF statistics. We find the relationship between the trade balance and real exchange rate in Pakistan. On the annual time series data for the years 1961-2013 we used unit root test for stationarity, and johansen’s cointegration test for long-run equilibrium relationship between the variables for each model. The central outcomes of this study are: long run relationship exists between trade balance and exchange rate, these relationships are explaining that exports significantly affect with the exchange rate in short-run and in long-run also. The long run relationship also exists and devaluation of the currency improve the trade balance by increasing the exports and decreasing the imports.

Keywords: Exchange rate, Trade balance

DOI: 10.7176/JESD/11-7-01

Publication date: April 30^th 2020