THE EFFECT OF EXCHANGE RATE FLUCTUATIONS ON TRADE BALANCE OF PAKISTAN

Abstract

This main goal of this study is to check the exchange rate fluctuations and its impact on trade balance in Pakistan. The annual time series data from 1971 to 2016 is used to check the short run and long run relationship between Exchange rate fluctuations trade balance of Pakistan. We employed the autoregressive distributed lag approach and results reveal that Exchange rate has positive and significant relationship with balance of trade in long run and short run. Devaluation of Pakistani rupees against USD, would increase the exports and ultimately trade balance will enhance. The inflation and money supply has negative and significant relationship with balance of trade in long run in Pakistan. The excess of money supply will increase inflation which reduces the exports and consequently, balance of trade would decrease. This study has a policy implications for government as well as local and foreign investors. The government should also play an important role to make such strategies which can increase the balance of trade in Pakistan and can boost the economic growth of Pakistan indirectly.