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Exchange Rate Essay

4834 words - 20 pages

Volatility of exchange rate
The main objective of this research is to present a rationalized concept of the theory and composition of exchange rate that are compulsory to solve the important economic problems facing the economy in the country, like volatile exchange rate, unbalanced financial circumstances and frustration of government to have control over domestic money market. “Exchange rate” shows that how much unit of onenation’s currency can be purchased with one unit of domestic currency. More precisely, exchange rate is a conversion factor that determines rate of change of currencies. While exchange rates volatility shows that exchange rate is settled on demand and supply of one ...view middle of the document...

Secondly, the investors increase global varieties in the asset market. An assumption is made-up in mind that exchange rate volatility and selected macroeconomic variables play a pivotal role in the domestic and foreign economy. Therefore, it is considered an appropriate time for such an analysis for the economy of Pakistan. Nevertheless, theory recommends that exchange rate volatility; exports, imports, manufacturing products and reserve money in the presence of open economies have deep relationship with each other.The foremost purpose of the present study is to see whether exchange rate volatility affects imports and exports, manufacturing products, and reserve moneyor not and if so, then in what direction? Exchange rate appreciation will affect exports, reserve moneyand manufacturing products positively and imports negatively, conversely, depreciation of exchange rate will affect exports, reserve and manufacturing productions negatively and imports positively. Here we will see the short-run and long run relationship between volatility of the exchange rate and selectedmacroeconomic variables. Theoretically, if depreciation of Pakistani currency exists (Pak Rupees/US$ increase in value), then this will raise competitiveness of the domestic goods and hence encourage exports. By the same way, appreciation of the Pak Rupees is expected to reduce imports and to improve trade balance In view of the fact that the adoption of volatile exchange rates in the developing countries in 1973, the question arises whether exchange rate volatility has some effect on exports, imports, manufacturing products and reserves or not. The answer to thisquestion may be framed in the review of literature. Therefore, various studies have estimated the relationship between exports, imports and exchange rate volatility. Akhtar and Hilton (1984), Kenen and Rodrik (1986), Rogoff (1998), Persson and Svensson (1989), have created adverse influence of exchange rate uncertainty on imports and exports. Rogoff (1998) stated that exchange rate flexibility generatsignificant problems for both exporters and importers. Arize (1998) also proposed that negative significant relationship between exchange rate instability and imports and exports exists in the long run and short run. De Grauwe (1988) suggested that if the fabrication of model is accurate, then relationship between exchange rate volatility and trade should be positive. Qayyum and Kemal (2006es found that there is strong relationship between the volatility of foreign market and the volatility of returns in stock market. Khan and Sajid (2005) investigated both the long and the short run relationship between real money balances, real income, inflation rate, foreign interest rate and real effective exchange rate with reference to Pakistan over the period of 1982:Q2 to 2002:Q4. They use ARDL and estimated results indicate that in the longrun real income, inflation rate, ...

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