Correction Of Trade Deficit Through Devaluation- A Misleading Policy Implication: An Empirical Evidence From Pakistan With Its Major Trading Partners
Author: Naseem Akhtar

In the developing world favorable trade balance is considered as the important measure of development of an economy. Depreciation is typically considered to improve the trade balance, at-least after a suitable duration of time that results in a misleading policy tool, supporting the logic that export demand is less responsive to change in real exchange rate. In order to clear this misconception this study measures the export and import elasticity while considering the prevailing RER in Pakistan. In doing so current study have used the country wise data of bilateral trade and also checked the aggregate biasedness still exist or not using disaggregate data in order to avoid the aggregate biasedness that arrives in elasticity approach used by previous studies on aggregate trade data by applying Dynamic heterogeneous panels techniques, hence removed the misconception that One reason for not finding any significant effect of devaluation is because of aggregation biasness. This study also reveals that the depriciation isn’t useful for increasing demand for exports however it increment the imports demand and eventually fall apart the balance of trade. Consequently, study dismiss the presence of J-curve phenomenon in case of Pakistan Further, it also investigated that whether the increase in interest rate(determinant of exchange rate) results in decrease in trade deficit of Pakistan, since it is notable that the countries which are facing high deficit of trade typically have higher loan fees in order to redsuce trade shortfalls as compare to those with excess or adjusted balace of trade. so that we are able to conclude that this determinant of trade is not creating structural problem in our trade balance, infact it improves the trade balance by attracting foreign funding from abroad. The panel ARDL approach is applied for analysis from the period of 1987-2020. The outcomes reveals that devaluation is a misleading policy tool, hence deteriorate the trade balance. The study recommends various policies that can be implemented to avoid exchange rate fluctuation risk Supervisor:- Dr. Hafsa Hina

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Supervisor: Hafsa Hina

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