Exchange Rate Regimes and Economic Dynamics: Insights from Pakistan

Abstract

The study delves into the intricate dynamics of exchange rate regimes and their implications for various economic variables within the context of Pakistan. It seeks to provide a comprehensive understanding of how different exchange rate policies impact key indicators such as inflation, trade dynamics, and foreign direct investment. Central to this analysis are two primary measures of exchange rates: the official exchange rate, which reflects the rate set by the government or central bank, and the real effective exchange rate, which considers the relative value of a country's currency against a basket of foreign currencies adjusted for inflation. Employing a rigorous Ordinary Least Squares (OLS) approach for time series analysis, the study spans a significant period of three decades from 1980 to 2016. Data collection is meticulous, drawing from a diverse array of reputable databases renowned for their reliability and accuracy. This meticulous approach ensures the robustness and credibility of the findings. One of the focal points of the research is the examination of how different factors influence exchange rates, particularly the real effective exchange rate. Notably, variables such as the current account balance, foreign aid inflows, and foreign private investment are scrutinized for their impact on exchange rate dynamics. By identifying the sensitivity of the real effective exchange rate to these factors, the study sheds light on the nuanced relationships shaping Pakistan's currency valuation in the global market. Furthermore, the study ventures into the realm of monetary policy by assessing the role of the State Bank of Pakistan in managing currency fluctuations and volatilities. Questions regarding the autonomy and transparency of the central bank's operations are explored, offering insights into the mechanisms through which monetary authorities navigate the complexities of exchange rate management. In synthesizing its findings, the research underscores the intricate interplay between exchange rate regimes and various economic phenomena. It elucidates how inflationary pressures, foreign direct investment flows, and other macroeconomic variables are intricately linked to exchange rate dynamics in Pakistan. By elucidating these relationships, the study not only enhances our understanding of the country's monetary landscape but also provides valuable insights for policymakers and practitioners tasked with formulating effective economic policies.