Real Exchange Rate and Trade Balance of Pakistan : An Empirical Analysis

This study evaluates the relationship between real exchange rate and trade balance prevailed in Pakistan during the 1985-2010 period. Engel Granger residual based and Johansen Juselius tests have been used to inquire into the long term connection between exchange rate and trade balance. Error correction model is then employed to study the short term connection. It has been discovered that there exists a connection between real exchange rate and trade balance in long as well as short run. The evidences set forth lead to a decisive conclusion that Marshall Lerner Condition and J curve effect both hold in case of Pakistan