Exchange Rate Instability and Trade: The Case of Pakistan

Research Reports
Author: M Ali Kemal
Publication Year : 2005

Exchange rate is a vital macroeconomic variable and backbone of trade. The variations in exchange rate play an important role in the determination of trade balance. Volatile exchange rate slows down the process of trade, destabilises the capital movements, and shatters the investor’s confidence to invest in a country with high exchange rate volatility, which in turn slows down the process of growth. Instability in exchange rate can influence longer-term decisions by affecting the volume of exports and imports, the allocation of investment and government sales and procurement policies. In medium term, it can affect the balance of payments and the level of economic activity, while in the short run local consumers and the local trader can be affected.

M. Ali Kemal, Staff Economist, Pakistan Institute of Development Economics, Islamabad.