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This study examines the impact of the depreciation of domestic currency on economic performance of Pakistan using Vector Autoregressive Approach (VAR). The study further tries to explain that although the main sources of variation in price and output are “own shocks” but variations in exchange rate affects output level more than it effects the inflation. A devaluation of currency has positive impact on inflation and output. Devaluation can be managed by increasing money supply and improving trade balance. In long run, a change in real exchange rate do not have significant effect on output.