Ever since humans started barter trade there is existence of exchange rate. Considering several countries simultaneously trading,hence this study has used the panel data models to incorporate the spill over effects of trade and heterogeneous technology effects in long run and short run.By using Common Correlated Effect Mean Group panel data model between 4 trading partners based on their contribution in Pakistan's trade and capital inflow for the years of 1992 to 2012, it can be concluded, Monetary model has significantly determined the exchange rate. For this group of countries only interest rate and monetary differential is significant in managing exchange rate. It takes 13 months to recover any disequilibrium in this Model suggesting that any exchange rate management policy option can be realized in a year. The monetary model superseded the random walk model in terms of in-sample forecasting.
