Abstract :
This study aims to investigate that whether or not exchange rate depreciation has impact
on trade balance of Pakistan when it is trading with developing eight countries (D-8). Jcurve
theory of trade postulates that initially, on depreciation of a country’s currency, it
deteriorates the trade balance, however, in long run when adjustments are taken place the
trade balances improves. Actually, the depreciation makes the foreign goods (imports)
expensive for the home country and domestic goods (exports) cheaper for the rest of the
world. Consequently, it improves the balance of trade, hence the balance of payment of a
country. This study uses the quarterly data from 2005QI to 2014QIV to assess the effects
of exchange rate on balance of trade of Pakistan to investigate the J-curve phenomenon in
the case of Pakistan with D-8 group. A relatively new empirical estimation technique of
ARDL has been applied along with Granger Causality test. Hence, the empirical results of
this study found a long run positive significant impact of exchange rate depreciation on
trade balance along with a short run negative significant effect. Therefore, these finding
support the existence of J-curve in the case of Pakistan with D-8. It is concluded that
depreciation policy may be used as a policy tool to correct the deficit in balance of trade of
Pakistan especially when trading with developing economies.
