Abstract:
Purpose of the Study: The purpose ofthis study is to identify the impact ofmacroeconomic
variables which brings fluctuation in Pakistan’s exchange rate. For this purpose the main
macroeconomic variable has been used are inflation rate, gross domestic product and current
account to identify its impact on Pakistan’s exchange rate. The study is conducted to find out
the combined effect of inflation rate, gross domestic product and current account on
Pakistan’s exchange rate
Research Method: Research approach for this study is deductive approach. The nature of
this study is explanatory. Inflation rate, gross domestic product and current account are the
independent variables whereas Pakistan’s exchange rate is dependent variable. For this
purpose, annual secondary data has been taken for the time period of 1994-2014. The
hypotheses build to find out the combined impact of inflation rate, current account and gross
domestic product on Pakistan’s exchange rate.
Finding of the research: The finding of this study suggests that there is strong positive
correlation between gross domestic product and exchange rate. The study further shows that
the second important variable which brings more volatility in Pakistan’s exchange rate is
current account balance. Whereas the findings demonstrate that inflation rate has no
significant impact on exchange rate.
Practical implication of the research: Based on the findings of this study it is
recommended that government of Pakistan should make an effective link between exchange
rate and current account deficit. As the result shows that current account deficit has a
significant negative impact on exchange rate so in order to get rid of this deficit balance,
Pakistan government need to make such policies in favor of current account balance so this
will also bring positive influence on Pakistan’s exchange rate . This study will help investors
to take the precautionary steps and analyze macroeconomic variables before they invest in
foreign currency.
