Dynamics of Exchange Rate Volatility and Capital Inflows: A case study of Pakistan

Abstract

Enormous fluctuations inExchange Rates have been observed during the last three decades as compared to the 1950s and 1960s.Numerous explanations have been extended to capture the movement of exchange rates with the help of available theories in hand. But some factors can be identified which influence the process of exchange rate determination. By following economic theories, an illustrative model is developed to test long and short run association among Foreign Direct Investment, Official Development Assistance, workers remittance,Exchange Rate movements and Gross Domestic Product in developing economy like Pakistan. To investigate short and long run equilibrium, data was collected from different databases covering the period of 1982 to 2016 and cointegration technique is applied with desired equation. The results depictthatOfficial Development Assistance; workers remittance,Foreign Direct Investmentand Gross Domestic Product influence the Real Exchange Rate in long and short run. The results further explored that inflow of foreign currency in the way of official development assistance, workers remittance and foreign direct investment boosted up exchange rate especially in developing economies.