Nominal vs. Real Effective Exchange Rate Dynamics and Their Asymmetric Impacts on Pakistan’s Sectoral and Aggregate Trade
DOI:
https://doi.org/10.52461/sabas.v7i2.4581Keywords:
Nominal, NARDL, Marshal-Lerner, Asymmetric, DepreciationAbstract
This study investigates the role of nominal and real effective exchange rates as determinants of Pakistan’s foreign trade at both aggregate and sectoral levels, covering total, food, textile, petroleum, and other imports and exports over the period July 2009 to June 2025 using monthly data. Employing both ARDL and NARDL frameworks, the study examines symmetrical and asymmetrical effects of exchange rate fluctuations on trade flows, providing a comprehensive analysis of linear and nonlinear dynamics. The results reveal that imports are generally more responsive than exports, with nominal exchange rate exerting stronger influence on aggregate imports, while real effective exchange rate plays a significant role in textile imports. Asymmetric analysis indicates that depreciation and appreciation impact trade differently, with depreciation often reducing imports but failing to stimulate exports proportionally. Among export categories, textile exports are the only sector significantly sensitive to exchange rate changes. Domestic income consistently increases imports across all sectors, highlighting Pakistan’s import dependence during periods of economic growth. Furthermore, the Marshall-Lerner condition is not satisfied at the aggregate level, suggesting that currency depreciation alone is insufficient to improve the trade balance, although it may hold at the sectoral level for textiles and food. These findings provide critical insights for exchange rate policy, sectoral trade interventions, and export diversification strategies aimed at enhancing Pakistan’s trade competitiveness and macroeconomic stability.
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