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Decoding exchange rate in emerging economy: Financial and energy dynamics
Saif Ullah1, Haitham Nobanee2,3,4
1College of Management and Applied Sciences at Ziauddin University, Karachi, Pakistan.
Heliyon
|February 5, 2025
Summary
Foreign direct investment (FDI) and fuel prices strengthen Pakistan's exchange rate, while inflation and stock market declines cause depreciation. Remittances require careful management for positive exchange rate impact.
Area of Science:
- Economics
- Financial Markets
- Energy Economics
Background:
- Exchange rate volatility is a critical issue for emerging economies.
- Understanding the interplay of financial and energy factors is crucial for economic stability.
- Pakistan's economy faces unique challenges related to currency fluctuations.
Purpose of the Study:
- To investigate the determinants of exchange rate movements in Pakistan.
- To analyze the short- and long-run impacts of financial and energy variables on the exchange rate.
- To provide policy recommendations for sustainable economic development.
Main Methods:
- The study utilizes the Autoregressive Distributed Lag (ARDL) Bounds Test.
- Time-series data from July 2006 to June 2021 is analyzed.
- Both short-term and long-term relationships are examined.
Main Results:
- Foreign Direct Investment (FDI) positively influences exchange rate stability.
- Energy factors, specifically fuel prices, have a positive short- and long-term impact.
- Stock market declines and rising inflation are linked to currency depreciation.
- Remittances show a complex, potentially adverse, effect on the exchange rate if unmanaged.
Conclusions:
- FDI and stable energy prices are key to a stronger exchange rate.
- Effective management of remittances is vital to mitigate adverse effects.
- Policy interventions should address inflation and stock market volatility for exchange rate stability.
Keywords:
Currency appreciationEnergy fuel pricesExchange rateForeign investmentsStock market return. currency depreciationMore Related Videos
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