Time Series Analysis of Real Effective Exchange Rates on Trade Balance in Pakistan

Many developing countries including Pakistan face the problem of trade deficit. These countries use various measures to improve the trade balance. One of the components is devaluation of domestic currency. The purpose of this paper is to find whether the devaluation using REER is effective in improving the trade balance in Pakistan or not. The bound testing approach of ARDL is used to estimate the long run relationship among the variables, after endorsing stationarity through ADF test. The time series annual data from 1981 to 2008 are used to estimate the results. There is a long run relationship among the variables as Wald F-statistic is higher than the upper bound critical value at 1 percent level of Pesaran.