Pakistan’s External Trade: Does Exchange Rate Misalignment Matter for Pakistan?

Abstract

This paper is primarily aimed at assessing the significance of the exchange rate on Pakistan’s foreign trade. It estimates the Equilibrium Real Effective Exchange Rate (ERER) and exchange rate misalignment for Pakistan using annual data from FY78 to FY06. The Engle Granger cointegration technique is used for the estimation of ERER depending upon various macroeconomic fundamentals as recommended by Edwards (1994). The results of the study are also used for the forecasting of ERER and misalignment up to the year 2010. The results of the study reveal that ERER is determined by variables such as: a) terms of trade, b) trade openness, c) net capital inflows, d) relative productivity differential, e) government consumption, and f) workers’ remittances.