Fluctuations in Exchange Rate and its Impact on

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Fluctuations in Exchange Rate, and its Impact on Macroeconomic Performance of Pakistan Farzana Shaheen. The International Monetary Fund and the Central Bank sometimes. propose the same on the grounds that it improves external. competitiveness increases exports reduces imports and thus. improves trade and current account balances It is also argued that. devaluation initially worsens but eventually improves balance of. Has Pakistan achieved these objectives Have exports. increased and imports reduced Has external payment situation. improved as a result of depreciation The scenario of Pakistan is. different and unfortunately from past few years Pakistan economy. is in threat as major sectors of the economy are showing negative. growth Although the exports were increased during FY11 but. imports were also increased According to the Federal Bureau of. Statistics FBS the overall imports during FY11 were 40 414. billion as compared to 34 710 billion during FY10 which is an. increase of 16 43 per cent Increase in imports is mainly due to. import of petroleum its related products in the midst of fast. depreciating exchange rate In other words contrary to the theory. a negative relationship between devaluation and external balance is. On the other hand the exchange rate depreciation has. alone added Rs 1 125 billion in public debt At present it amounts. to 13 billion The rise in public debt would increase interest. payment reduce fiscal space for development spending and put. enormous pressure on budget Higher budget deficit would lead to. even more accumulation of public debt, Recently Pakistani rupee depreciated to an all time low Rs. 106 against per dollar due to high demand for import payments. Depreciation of the rupee further inflates import bill as well as. increases domestic price level thus reducing the purchasing power. of people and causing inflation in the country It may be realized. that for whatever reason our currency is depreciated it results to. weaken the economy as compared to the other countries Further. excessive depreciation of the past has adversely affected our credit. ranking in the international market, Summarizing the above discussion it can be said that. depreciation is not a long term solution to cobble together the. economy Unless the Government revises its economic policies. and execution of plans devaluation will not stabilize the external. value of our currency We must give highest precedence to the. consolidation of our economy along with expansion,The Dialogue 411 Volume VIII Number 4. Fluctuations in Exchange Rate, and its Impact on Macroeconomic Performance of Pakistan Farzana Shaheen.
Review of Literature, The topic of exchange rate has gained much more importance in. Pakistan since the floating exchange rate patterns has been. adopted Recently the studies are conducted to find whether. changes in exchange rate affect the macroeconomic variables of. any country or not This article identifies any such relationship. between exchange rate volatility and some of the macroeconomic. variables like exports imports and inflation in Pakistan. Theoretical relationship between exchange rate volatility and. macroeconomic variables of any country is described in many. studies but empirical investigation shows no such consensus about. it because of mixed pattern of results found in those studies. Aurangzaib et al investigated the relationship among. economic performance growth and exchange rate uncertainty in. Pakistan 1 Auggir et al evaluated the growth effects of real. exchange rate fluctuations and their volatility 2 Egert et al. analyzed the direct and indirect impact of exchange rate volatility. via changes in exchange rate regimes on the export performance 3. Lourenco analyzed the global picture of exchange rate regimes of. 33 advanced and emerging economics 4 Hussain et al investigated. the durability and performance of alternative exchange rate. regimes of all IMF member countries 5 Avellan evaluated the. relationship between parallel exchange rates 6 Hoffman compared. fixed exchange rate with floating exchange rate 7 Vuletin analyzed. the influence of exchange rate policies on fiscal performance. focusing on the difference between fixed floating exchange. rate 8 Zhang reviewed China s foreign exchange reforms and. analyzed their impact on the balance of trade and inflation 9. Larrain et al put light on the question of which exchange rate. policy is suitable for middle income countries 10 Kawai et al. discussed conceptual and empirical issues relevant to exchange. rate policies 11 Bleany et al used a model to explain that. inflationary expectations in developing countries may be abridged. if exchange rate of developing countries is pegged to exchange rate. of developed countries 12 Frey investigated the impact of short run. volatility of exchange rates on the volume of exports 13. Research Methods, The present study was conducted among the exchange rate Y. consider as dependent variable by taking the Pak rupee to US. dollar on the selected three independent variables i e inflation rate. X1 import X2 and export balance X3, Secondary data was utilized to obtain the required. The Dialogue 412 Volume VIII Number 4,Fluctuations in Exchange Rate. and its Impact on Macroeconomic Performance of Pakistan Farzana Shaheen. objectives The data was collected through the secondary sources. various issues of Economic Survey of Pakistan and Quarterly. reports of State Bank of Pakistan were used covering all the. information needed for the study, In the given study the response variable was considered as.
binary depending whether the respondent is a yes or no The. response variable takes the value 1 for yes and 0 otherwise In. addition the following 3 variables factors are considered as. independent variables affecting or not the response which are i. X1 ii X2 iii X3 All these variables were measured in their. respective units qualitatively or quantitatively and then. transformed to binary variables according to the following criteria. X1 1 if yes and 0 otherwise X2 1 if yes and 0 otherwise. and X3 1 if yes and 0 otherwise,Results and Discussions. Simple counts and percentages were obtained to know the. frequency of each of the selected variables In order to test the. association between the exchange rate 1 or 0 and the selected. variables regression analysis was applied with 5 level of. probability In addition some other statistical techniques were also. Table 01 Exchange rate and Inflation rate,Model Unstandardized Standardized T Sig. Coefficients Coefficients,Constant 7 233 2 597 0 029. Pak USD 18 782 0 115 0 780 3 740 0 005,Exchange 0 430. In the table values b0 is the intercept term which gives the average. effect on Y of all the independent variables excluded from the. model The estimated regression co efficient b1 0 780 which. indicates that the inflation rate increases by 0 780 units for a unit. increase in exchange rates and vice versa Similarly both the. estimated values b0 and b1 are significant at 5 level of. significance,The Dialogue 413 Volume VIII Number 4.
Fluctuations in Exchange Rate, and its Impact on Macroeconomic Performance of Pakistan Farzana Shaheen. Table 02 Co efficient of determination,Model R R2 Adjusted Std Error Durbin. R2 of the Watson,1 780a 608 565 3 570948 1 455, The co efficient of determination R2 0 608 shows that almost. 61 of variation in inflation rate is due to changes in the exchange. rate of Pak USD, Table 03 Comparison through co efficient of correlation. Model Pak USD Exchange Inflation Rate of,Rate Pakistan.
Pak USD Exchange Rate 1 0 870,Pearson Correlation 0 005. Sig 2 tailed 11 11,Inflation Rate of Pakistan 0 870 1. Pearson Correlation 0 005,Sig 2 tailed 11 11, The correlation co efficient r 0 780 shows there is a highly. positive correlation between the two variables i e Pak UD. exchange rate and inflation rate of Pakistan Correlation shows. how the two variables vary together Similarly p value 0 005. shows that both the variables are highly significant at 5 and 1. level of confidence,Table 04 Hypothetical results through ANOVA. Model Sum of,Df Mean SquareF Sig,Regression 178 372 1 178 372 13 988 0 005.
Residual 114 765 9 12 752,Total 293 137 10, The above result shows that Pak USD is significantly influenced. by the inflation rate at 5 and 1 level of confidence. The Dialogue 414 Volume VIII Number 4,Fluctuations in Exchange Rate. and its Impact on Macroeconomic Performance of Pakistan Farzana Shaheen. Table 05 Some results through t test, The p value 0 000 shows that the variables are highly significant. Table 06 Results of co efficient for the said model. The values of b1 show that exchange rate affects inflation rate and. annual imports positively while it affects annual exports. negatively An increase of 1 in the exchange rate will cause an. increase of almost 70 in the inflation rates of Pakistan and vice. versa Moreover an increase of 1 in the exchange rate will cause. an increase of 68 in the annual imports of Pakistan and vive. versa On the other hand a 1 increase in the exchange rate will. cause a decrease of almost 62 in the annual exports of Pakistan. Table 07 Results of R and R2, The co efficient of determination R2 0 614 shows that almost. 61 of the variation in inflation rate annual exports and annual. imports is due to the variation in the exchange rate between PAK. Rupee and US dollar,The Dialogue 415 Volume VIII Number 4.
Fluctuations in Exchange Rate, and its Impact on Macroeconomic Performance of Pakistan Farzana Shaheen. Table 08 Results through correlations, Pearson correlation co efficient shows that Pak USD Exchange. rate and inflation rate are highly correlated 0 760 Pak USD. Exchange rate imports and exports and moderately co related. Moreover the p values 0 005 0 036 0 025 shows that the three. variables are significant,Conclusions and Recommendations. The present study aim to establish a relationship among the exchange. rate volatility on the macro economic variables i e inflation rate. annual exports and imports of Pakistan has been analyzed through the. application of regression techniques Based on the results obtained. from the analysis of given secondary data the following conclusion are. The regression shows as the value of Pak Rupee against the. US dollar decreases it has a positive impact on the exports of the. country This helps to temporarily boost up the exports of the country. While due to the decrease in the value of Pak rupee the imports. become dearer and expensive for the country which adversely affects. the balance of payment position of the country, In the history of Pakistan there is only one occasion when the. rupee appreciated against US dollar for the remaining years it is. devalued or depreciated against the US Dollar This caused a. temporary boost up of the exports because on the other hand the price. The Dialogue 416 Volume VIII Number 4,Fluctuations in Exchange Rate.
and its Impact on Macroeconomic Performance of Pakistan Farzana Shaheen. level in the country is increased which takes away the temporary. benefits from the boost up of exports, It may be realized thus that for whatever reason the currency. is devalued it results in weakening of the economy as compared to the. other countries Moreover foreign investors become more conscious. for making any investment in the country, Summarizing the above discussion it can be said that. depreciation or devaluation is not a long lasting approach to improve. the economy The findings suggest that the explanatory variables and. dependant variables are highly correlated and thus it is recommended. that the policy makers in Pakistan should consider both the existence. and the degree of the exchange rate volatility and notice the likely. impact of volatility on each macro economic variable in. implementation of the trade policies so that higher volumes of trade. and direct foreign investment may be attracted Unless the government. revises its economic planning and execution of plans no amount of. devaluation or depreciation will stabilize the external value of our. The Dialogue 417 Volume VIII Number 4,Fluctuations in Exchange Rate. and its Impact on Macroeconomic Performance of Pakistan Farzana Shaheen. Notes References, A Aurangzeb T Stengos A U Muhammad Short Run and Long Run. Effects of Exchange Rate Volatility on the Volume of Exports A Case. Study for Pakistan International Journal of Business and Economics. Vol 4 No 3 2005 209 222, A Aguirre C Calderon Real exchange rate misalignments and.
economic performance Working Paper No 315 Central Bank of Chile. B Egert A M Zumaquero Exchange Rate Regimes Foreign. Exchange Volatility and Export Performance in Central and Eastern. Europe Just Another Blur Project Oesterr eichische National Bank. R F Lourenco Exchange Rate regimes a Global Picture since the. Emerging Market Crises in the MID 1990s Economic Bulletin. Economics and Research Department Banco de Protugal 2004. A M Husain A Mody K S Rogoff Exchange Rate Regime, Durability and Performance in Developing Versus Advanced. Economies Journal of Monetary Economics Volume 52 1 2004 35. L M Avellan Parallel exchange rates and economic performance in. Fluctuations in Exchange Rate and its Impact on Macroeconomic Performance of Pakistan Farzana Shaheen The Dialogue Volum416 e VIII Number 4 Table 08 Results through correlations Pearson correlation co efficient shows that Pak USD Exchange rate and inflation rate are highly correlated 0 760 Pak USD

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