The Dynamic Behavior of Exchange Rate and Balance of Payment: An Empirical Study for Pakistan

Abstract

The exchange rate is an essential macroeconomic variable that gives investors the best way to beat a balance between their business activities. The exchange rate implies the price of the domestic currency in terms of the foreign currency. In this regard, current study analyzed the impacts of exchange rate on BOP from the duration of 1991 to 2010. Increase in the ratio of exports and decrease the ratio of imports. Invent the import substitutes in home country rather than importing from other country. ARDL includes the lagged values of dependent variable and current and lagged values of independent variable. ARDL model is used when dependent variable is non stationary. Our dependent variable that is Balance of Payment is non stationary because that rejects the null hypothesis. Our null hypothesis is “BOP affects the Exchange Rate”. It means BOP has no effect on exchange rate. R Square value supports our theory that is 99%. F Statistics value is also significant.