SHORT-RUN AND LONG-RUN EFFECTS OF CURRENCY DEPRECIATION ON THE BILATERAL TRADE BALANCE BETWEEN PAKISTAN AND HER MAJOR TRADING PARTNERS

Previous studies that investigated the short-run (J-curve) and the long-run effects of currency depreciation on the trade balance of Pakistan used aggregate trade data between Pakistan and the rest of the world and provided no evidence of any significant impact. We wonder whether lack of the relation is due to aggregation bias. In this paper, therefore, we go one step further by employing disaggregated data at bilateral level between Pakistan and her 13 major trading partners to determine if we can discover partners whose trade balances react to changes in the real bilateral exchange rate. The results from bounds testing approach are still inconclusive and show that only in half of the cases the real bilateral exchange rate plays a role.