EXCHANGE RATE VOLATILITY AND ITS RELATIONSHIP WITH MACROECONOMIC VARIABLES IN PAKISTAN

Abstract

This study investigates the volatility of exchange rates and its relationship with selected macroeconomic variables; foreign direct investment, gross domestic product, and inflation. Secondary time-series data is used and collected from world development indicators for the time period of 29 years (1991 to 2019) of Pakistan. Unit root test, co-integration test, GARCH, and regression analysis are the techniques used for hypothesis testing. In this study, the Unit root ADF test is used to check the stationarity of data then GARCH is applied to check exchange rate volatility, co-integration, and regression analysis are applied to check the relationship between dependent and independent variables. The underlying study concludes the results that there is an existence of long-term and persistent volatility in exchange rates, and the exchange rate has a positive relationship with the gross domestic product and foreign direct investments but a negative and insignificant relationship with Inflation. The findings suggest that the exchange rates should be managed by decision-makers to have a positive impact on the economy. Many studies suggest that fixed exchange rates should be adopted by developing countries instead of floating exchange rates. This study is helpful for policymakers and for researchers.