Estimation of Marshall Lerner Condition in the Economy of Pakistan

Abstract

The paper evaluates Marshall-Lerner conditions in time when policy experts are facing severe structural unbalance in the economy of Pakistan. Study is based upon secondary data for quantitative analysis which spans over 30 years (1980 to 2010). Johansen Co-Integration approach was applied to examine Marshall-Lerner condition. Stationarity of data set was confirmed by application of ADF test. Analysis shows that though economy of Pakistan is resilient to external shocks and facing exchange rate market pressures even then sustainable improvement in trade balance can be achieved for if policy makers adopt devaluation. But, it is point of caution that there is urgent need to manage other factors that set into motion if monetary experts go by with a policy of exchange rate depreciation in time when difficulties are arising in managing long run value of equilibrium exchange rate.