Impact of Exchange Rate on Balance of Payment: An Investigation from Pakistan

Abstract

The purpose of the study is to determine the impact of exchange rate on Balance of Payment, through investigation of Pakistan Economy. Thus in order to ascertain the volatility of exchange rates & its tendency on balance of payment, monthly data was collected of Exchange rate and Balance of Payment from the official website of State Bank of Pakistan. The data comprised of seven year time period from January 2007 to October 2013. In order to achieve the purpose various test such as unit root, ARDL and Granger causality test are employed which helped us reached to the conclusion that there is a significant and positive relation between Exchange rate and BOP, therefore we could conclude that Stability of exchange rates may create a positive environment by encouraging the investment, and this can improves balance of payment.

Keywords: Balance of Payment, Exchange Rate, Pakistan, Volatility, State Bank

JEL Classification: B23, C12, C22