Exploring the Existence of J- Curve in Pakistan: An Empirical Analysis

Abstract

The favorable trade balance is a good indicator for developing economies. The main focus of the present study is to explore the effect of devaluation on balance of trade in Pakistan. The study considers the time period from 1972 to 2014 for examining the effect of exchange rate on balance of trade. The Auto Regressive Distributed Lag model technique is applied for analysis. We have examined both short-run and long run behavior of exchange rate. In order to determine the shape of the J-curve and to capture the non-linearity effect of the exchange rate on net trade, we have introduced the squared term of the exchange rate. The analysis verifies the existence of J-curve in Pakistan. Moreover, study concludes that GDP growth, Foreign Direct investment and inflation rate favor the trade in the long run.