Macroeconomic determinants of the real exchange rate in Pakistan

Abstract

This research endeavors to comprehensively examine the macroeconomic determinants that influence the real exchange rate in Pakistan over an extended temporal horizon. By employing quarterly data spanning from the first quarter of 1980 to the fourth quarter of 2020, this study employs the autoregressive distributed lag (ARDL) methodology to discern both immediate and enduring determinants of the real exchange rate. The findings distinctly reveal that variables such as money supply, trade openness, workers' remittances, and productivity collectively constitute the long-term determinants of the real exchange rate in the context of Pakistan. Specifically, an augmentation in money supply and an escalated level of economic openness manifestly contribute to the reduction of the real exchange rate, whereas an inflow of remittances and heightened productivity exhibit the propensity to elevate the real exchange rate over an extended duration. This exploration underscores the imperative for proactive engagement by the nation's monetary authorities within the foreign exchange market, with the overarching objective of preserving the currency's value at a state of equilibrium and, thereby, ensuring the holistic integrity of the economy.