IS THERE J-CURVE EFFECT IN THE TRADE BETWEEN PAKISTAN AND UNITED KINGDOM? ASYMMETRIC EVIDENCE FROM INDUSTRY LEVEL DATA

Abstract

Pakistan is a country which is facing chronic trade deficit since its independence and currency devaluation have always remained an effective strategy to bridge this gap between imports and exports. Previous studies which assessed the influence of changes in exchange rate on Pakistan’s trade balance followed a symmetric or linear approach. However, in this study we adopt an asymmetric approach, according to which appreciations and depreciations have asymmetric effects on the trade balance of Pakistan. Using commodity trade data of 28 (2-digits) industries that trade between Pakistan and United Kingdom, we find pattern of the J-curve in nine industries when a linear model was estimated. However, when we estimated a nonlinear model, the concept of asymmetric J-curve was supported in 14 industries. The largest industry (clothing) which engages in 36.5% of the trade was found to benefit from rupee depreciation.