CASUAL RELATIONSHIP BETWEEN EXCHANGE RATE VOLATILITY AND MACROECONOMIC INDICATORS IN EMERGING ECONOMY: A CASE STUDY OF PAKISTAN

Abstract

The exchange rate dynamics play an imperative role in deciding the landscape of any economy, manipulating the critical indicators of emerging economies. The study investigates the association between exchange rate volatility and Pakistan's macroeconomic indicators. The current research delves into a specific case of Pakistan to determine the comprehensive and indepth analysis of exchange rate and macroeconomic factors. The study used secondary information only from 2000 to 2023, and data was collected from authentic sources such as the IMF, World Bank, and Pakistan Statistical Bureau. Exchange rate volatility is used as a dependent variable, while Exports, GDP, Government Expenditures, Imports, and Inflation rates are used as independent variables. Eviews statistical software is used to evaluate the outcomes of the study. Summary Statistics results show that exchange rate fluctuation positively affects Pakistan's exports and imports, while GDP, government expenditures, and inflation rate are negatively affected by exchange rate volatility. According to the Correlation Matrix, all variables are positively correlated. It was found that Government Expenditures Granger causes the exchange rate in Pakistan; however, Exports, GDP, Imports, and Inflation rate are not Granger caused by the exchange rate but directly affect these factors. It is recommended that a sound monetary policy be adopted and considered. Policymakers should develop sound policies to manage the money supply in the financial market that will decrease the inflation rate and create more opportunities for foreign investors to enhance economic growth and depreciate the exchange rate.