Does an exchange rate depreciation improve the trade balance of Pakistan?

We investigate the impact of an exchange rate depreciation on Pakistan’s trade balance, using data for 1968–2019 in a simultaneous four equations model estimated by GMM. Our results suggest that a real exchange rate depreciation decreases imports and increases exports. However, as exports are also affected by imports, a real exchange rate depreciation not only has a depressing effect on imports but also on exports. The income elasticity of imports is high. Our findings imply that the Marshal–Lerner Condition does not hold for Pakistan. Moreover, we find that trade liberalization and the country’s nuclear ambitions impacted Pakistan’s trade balance.