Exchange Rate, Monetary Policy and Balance of Trade: An Empirical Investigation of Pakistan

Abstract

The current study investigates the real influence of the rate of exchange in real terms, GDP in real terms, money supply and infrastructure on the balance of trade in Pakistan by employing Johnson co-integration and ECM. The real GDP and infrastructure positively affected mini missing the gap of trade deficit to improve the trade performance of the economy of Pakistan.In contrast, the factor of effective exchange rate and money supply negatively affected on trade deficit of the country. The rate of R-Square is 0.85, it tells that 85 percent variation in the balance of trade is captured by independent variables.The important recommendation of this research is that the exchange rate should be stable and consistent with the equilibrium path. The negative ECM value of -40 obviously pointed out that there is a 40 percent convergence of the total said parameters in mini missing the gap of trade deficit for the economy of Pakistan.