Abstract:
“In asia, Pakistan is among one of small open economy that came into being on August 14, 1947. GDP makes small size of economy evident that stood to be 12085371 million rupees in which money supply shares and remittances and foreign exchange reserves were 41.44%, 3.87% and 6.34% respectively during 2007-2008.”
“Whereas, the openness of the economy can be judged from the share of its exports and imports in GDP which reached to 11.63% and 24.42% during 2008 (i.e. For detail see table 4.1). Rupee is the name of Pakistan currency, the official code of which is PKR. It consists of 1, 2 and 5 rupee coins and 5, 10, 50, 100, 500, 1000 and 5000 currency notes. As USA is one of the major trade partners of Pakistan and dollar is the most trading currency in the international foreign exchange markets, the exchange rate of rupee is usually measured in terms of US dollar.”
“Although the role of exchange rate was minimum during the fixed exchange rate era, however in the wake of speedy process of trade liberalization and financial integration of the economies, the role of exchange rate has increased significantly in the conduct of monetary policy and overall macroeconomic performance. Although fluctuations in exchange rate can be beneficial for an economy, a large number of studies showed that these positive impacts of the exchange rate become doubtful when it is studied for the developing countries like Pakistan where agriculture fulfils most of the needs of domestic and foreign sectors and looking to their heavy dependence on foreign countries for its exports and imports.”
“A country such as Pakistan in which the exchange value of currency fluctuates frequently the stability of exchange rate is very important for economic growth and stability. There can be favorable or unfavorable consequences of the fluctuations in the exchange rate on macroeconomic variables of economy of a country depending upon the shared relationship. However the performance of macro economy also influences the exchange rate fluctuations. Further a lead-lag relationship that may exist i.e. exchange rate may be leading or lagging macro-economic variables. Another dimension is that the relationship may be short-run or long-run oriented or both.”
