Impact Of Macro Economic Factor (Interest Rate, Inflation Rate, Gdp Per Capita Growth, Fdi) On Exchange Rate

Abstract

Among the developing countries, Pakistan experienced a unique downward trend in rupee value and frequent transitions in the exchange rate systems. Exchange rate is one of the most important indicator of economic growth of a country and its instability has major impact on international trade. These distinctive features make Pakistan economy an interesting case study for the empirical examination of the rupee exchange rate and its role in the monetary policy and macroeconomic performance. The purpose of the present study is to find out which of the macroeconomic indicators has managed the Pak-rupee exchange rate uncertainty during the study period. Furthermore, the effect of the exchange rate instability on selected macroeconomic variables has also been studied in the framework of a correlation and regression approach. The Time series annual data covering the period of 2001 to 2023 has been used for the empirical analysis.The Ordinary Least Squares method is used for the estimation of regression equations. For avoiding the problems of spurious relationship between the variables and series implications for the standard errors, various diagnostic tests have been applied. Study has taken exchange rate as dependent variable and selected macroeconomic variables as independent variables. In the current era is studying of investigates impact of interest rate, foreign direct investment, gross domestic product per capita and inflation rate on uncertainty of exchange rate in Pakistan.The result show that exchange rate has negative relationship with the variables such as interest rate (INT), foreign direct investment (FDI) and positive with GDP per capita (PCGDP) and inflation (INF), which is also supported by the theory and results. On the basis of the findings, it has been recommended that foreign factors in factors should also be taken into account for the stability of exchange rate.