Depreciation to correct trade deficit- a misdirected policy: Empirical evidence from Pakistan

A favorable trade balance is a positive indicator for emerging economies, and rectifying imbalances paramount every country. However, fixing deficits by depreciating the currency misguided policy approach. This study refutes this myth computing elasticity of Pakistan's exports, imports, using real exchange rate. It also examines degree to which elasticities respond changing regimes rate policies in Pakistan from 1982 2019. The structural break cointegration technique used empirical analysis. vector error correction model (VECM) employed establish long-run short-run relationships. findings show that depreciation boosts import demand rather than export demand, hence worsening balance. As result, dismisses presence J-curve case Pakistan. According analysis, has little bearing on economy's structure, necessity devaluation results economic inefficiencies trade-enhancing policies. government policymakers should reform economy let depreciate.