Macroeconomics Relations between Exchange Rate Instability, Exchange Rate Volatility, Trade and Economic Growth Variables: The Case of Pakistan

Abstract

This paper aims to determine whether Exchange Rate instability of Pakistan, affects it’s imports , Exports, Trade Balances, Foreign Exchange Reserves and GDP of Pakistan or not, and if so then in what direction. We have used pooled data from 1952 to 2010 (on annual basis), indirect exchange rate quotations (Dollars per Rupee) are used. We have estimated our equation by running each variable at lag 3, Estimated equation of explanatory variables (Exchange Rate, imports, Exports, Foreign Reserves) for explained variable (GDP) exhibits a significant relationship, which is highly sensitive. A change 1 basis point in exchange rate can result in thousand of USD change in GDP. The depreciation of exchange rate has a positive impact on the exports, but sudden and abrupt fluctuation in exchange rates can disturb economic growth. We have used: Correlation Removal methods, Multi-collinerity Detection and Removal Tests, Stability Test, Granger Causality Test, Auto correlation Detection and Removal Tests, in-order to make our model and it’s variable, a “good predictor” for determining the Trade Balances of Pakistan, significant enough, for future predictions about GDP.

Keywords: Exchange rate instability-Volatility, Trade, Imports, Exports, Economic Growth, Reserves Money, Auto-Correlation Detection & Removal Test, Stability Test, Granger Causality Test, Multi-Collinerity.