Impact Of Exchange Rate On Inflation In Pakistan Economics Essay

Impact Of Exchange Rate On Inflation In Pakistan Economics Essay

Inflation & amp ; exchange rate are two chief factors of macro-economics. Inflation is a rise in the general degree of monetary values of goods & A ; services in an economic system by the transition of clip. Exchange rate is really of import factor in economic which impact imports & A ; exports of state.

A state does non ever want the exchange rate to fluctuate because an exchange rate influences the degrees of its imports & A ; exports, which are the constituent of financial policy. Policy shapers want to keep rate at a peculiar degree or within a certain scope in order to accomplish given domestic policy ends related to the degree of growing of GDP.

In the perfect mobility the exchange rate motions and an accommodation of goods market is comparative to plus market and consistent outlooks. The extends that end product responds to a pecuniary enlargement in the short tally, this acts as an consequence on exchange depreciation which lead to an addition in involvement rates ( Dornbusch, 1976 ) .

There are three types of ways which gives stickiness in monetary values, the monetary values set by the houses in that currencies, the houses set the monetary values for currencies of consumers, or houses set the monetary values in the currencies of manufacturers ( Engel, 2001 ) . When the exchange rates alterations, the alterations appear in the comparative monetary values and do to bring forth extra uncertainness for equilibrium in markets. However, there is besides specifying that the alterations in footings of trade play the larger function of alterations in the exchange rates which affect the variableness of exchange rates ( Stockman, 1980 ) .

Inflation is one of the cardinal indexs of the state and provides of import information on the province of the economic system and sound macroeconomic policies that govern it. Inflation is the production of the disbursals of mode of things arise which leads to the promotion of the last in the monetary value of repasts.

For illustration, if the affair is stalwart and this leads to the increase of the monetary value of the production of the costs of increasing, and in bend this leads to increasing monetary values to maintain the crowd his net incomes. The discretional nature of the bing pecuniary policy in Pakistan is rising prices, and it is aiming to hit on the Pakistani economic system by concentrating attending on the pecuniary policy.

So the authorities of Pakistan is to do pecuniary policy more transparent for accomplishing the expressed end, and diminishing the rising prices. Therefore, it is increasing the public apprehension of the scheme of cardinal bank to present the mark, so the State Bank of Pakistan helps to supply an ground tackle for rising prices outlooks in the economic system.

The State Bank of Pakistan ( SBP ) has accomplishing a low rate of rising prices in a high precedence, and besides aims to back up the national state aims of Pakistan to run into the economic variegation and fight in the signifier of export from the universe.

1.2 Problem statement

This survey is to analyze the impact of exchange rate on rising prices in Pakistan economic system.

1.3 Hypothesis

H1: The Exchange rate explains the rising prices.

1.4 Outline of the Study

The variableness of industrial production end product higher in the government of fixed exchange rates alternatively of government of flexible exchange rates ( Flood & A ; Hodrick, 1986 ) . The consequence of ingestion goods purchases by the authorities is non the private public-service corporation, but per capita existent authorities outgo are the complex of single ingestion of goods. So notice that the demand of money depends on ingestion of goods instead than income and that is the of import differentiation of closed economic systems ( Obstfeld & A ; Rogoff, 1995 ) .

Pakistan major import is rough oil which is purchased in dollars. If foreign exchange rate additions, it has increased the cost of oil that has inauspicious impact on the economic system of Pakistan. Inflation is besides caused by international loans and the national debt.

As states borrow money, have to cover with the involvement that the concluding monetary values addition as a manner to maintain up with debts. The chief job of Pakistan is external debt, which has altered the economic balance. The most immediate consequence of rising prices is the worsening buying power of the rupee and its depreciation.

This survey has been helpful for economic policy shapers, foreign investors, economic analysts, concern pupils who are interested in macro-economics surveies. This survey identifies how two macro-economic factors are related with each other.

1.5 Definitions

Variables:

For this survey the undermentioned variables have utilized: –

Exchange Rates – Mugwump Variable:

The exchange rates are foreign exchange rate between two currencies. Every state has a foreign exchange market and is one of the largest markets in all states of the universe. It converts 3.2 trillion USD currency transition. It has two types i.e. fixed and drifting exchange rates. Meese and Rogoff ( 1988 ) , it depends on basicss such as money supplies, existent incomes, involvement rates and rising prices.

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Dictionary – Position detailed dictionary

Inflation – Dependent Variable:

Inflation has increased the general degree of monetary values of goods and services in an economic system by the transition of clip. Price rising prices step is the rate of rising prices, the one-year per centum alteration in general monetary value index ( normally the Consumer Price Index ) over clip.

Effectss of rising prices on the economic system have manifold and at the same time positive and negative. Negative effects of rising prices include a lessening in the existent value of money and other pecuniary points over clip, uncertainness over future rising prices which discourages investing and nest eggs, and high rising prices leads to deficits of goods if consumers begin stashing out of concern that monetary values increase in the hereafter.

Positive effects include a development of economic recessions, and debt aid by cut downing the existent degree of debt.

Chapter 2: LITERATURE REVIEW

The analysis of the pecuniary determiners of rising prices is of obvious involvement for the states that pursue a policy of rising prices aiming. This survey focuses on Pakistani economic system that is presently following an Inflation aiming attack or did so in the recent yesteryear. Currency stableness plays an of import function for the pecuniary governments in this economic system.

Exception of existent money growing regulation is included in the appraisal of Phillips curves for the four economic systems Bayesian theoretical account averaging ( McCallum, 1999 ) . Entrepreneurs seek stableness in the class says that keeps the monetary value of imported points from growing due to rupee depreciation, which is non merely back up the economic system in general, but besides exporters who use big sums of imported instances in the production of exportable excess.

Since the beginning of this financial twelvemonth, while the rupee has lost about 2.5 per centum of its value against the dollar and its depreciation rate is improbable to speed up in the approaching months due to continued influx of foreign capital and financess.

Besides include the support of IMF, partial release of the fund, a alliance of U.S. , which is portion of its payment duties by the Friends of Democratic Pakistan, highly strong influx of return of foreign workers of portfolio investings and possible pick-up in exports and foreign direct investing in the 2nd half of financial twelvemonth. Current rupee stableness has helped in incorporating imported rising prices and weakening rising prices outlooks.

Bankers expect that tendency continues throughout this fiscal twelvemonth, a national unit is depreciated more than 7.0-7.5 per centum during the full financial twelvemonth, against 19.5 per centum last twelvemonth. Businesses verify that the bankers are the forward currency screen in conformity with this outlook.

What Pakistan needs today is non a platform to establish an “ economic resurgence plan ” but what people need is an existent ‘economic resurgence. ‘ The chief job of Pakistan is the foreign debt which has risen to unwieldy proportions in the last decennary and the refund of which has created turbulency in external balance of Pakistan to such an extent that it does non run into its minimal necessary development demands. At present Pakistan can non last without fresh adoptions from foreign giver bureaus.

As emphasized by Choudhri and Hakura ( 2006 ) , an of import policy argument for the contemporary pecuniary and exchange rate policy executions is to uncover the grade to which alterations in exchange rates or import monetary values impact or pass-through into domestic consumer monetary values.

Soon there are three rates of exchange i.e. the bank rate, the inter bank rate and the unfastened market rate. The overall consequence on the foreign exchange rates should non be more than 5 to 6 per cent as the increased influx of foreign exchange have neutralize the consequence of the increased demand of private imports.

If the foreign exchange earners and remitters keep on acquiring a just exchange rate for net incomes, it is visualized that in the following few old ages exports can touch the $ 15 billion grade and abroad Pakistani remittals can bring $ 5 billion.

It was concluded that the exchange rate provender daze on domestic rising prices, foremost at the degree of monetary values of the maker and so the degree of consumer monetary values and the impact of dazes on the variables of monetary value the assorted phases of the supply is different.

The buying power para theory philosophy means different things to different people. There are two versions of this theory that is called the ‘absolute ‘ and the ‘relative ‘ reading. The first version of buying power theory calculated as a ratio of consumer goods monetary values for any state that has tended to the equilibrium rates of exchange.

In the 2nd version of comparative reading the rate of exchange rate have been determined between the two states and quoted with general degrees of monetary values of two states. This version amend the international trade theory which have been the portion of PPP, in which the non-traded goods ( services ) has been introduced, but the advantage is greater in respects of traded goods than non-traded goods, because of the premises of fringy rates of transmutation.

The relationship between buying power para and exchange rates provides the international comparing of national incomes and life criterions ( Balassa, 1964 ) . Lawrence ( 1976 ) gave another reappraisal of this buying power para theory. It has define two applications in economic sciences, the first application usage of the transition factor to reassign the informations in one national manner to another.

The usage of PPP is chiefly the organic structure of ( index figure theory ) and applications of GDP that have improved over the old ages and way breakage surveies in the country continue to look. The 2nd application of PPP did non hold the widespread credence, which has remained the unworldly applications.

Stockman ( 1980 ) develops the theoretical account of finding of monetary values of goods and exchange rates. The alterations in trade good monetary values due to provide and demand affect the alteration in exchange rates by buying power para deviations.The alterations in exchange rates have failed to resemble the alterations in monetary values of goods, because exchange rates more volatile than monetary values degrees and rising prices rates.

The survey proposes the equilibrium of exchange rates behavior and different international goods that have been traded. This relationship can non exploited by the authorities, because greater the alterations in footings of trade the larger the alterations in exchange rates variableness.

The divergences from PPP persists that fluctuation of exchange rates more than ratios of monetary value indexes. The consequences found the two reading of the relationship between exchange rates and footings of trade. In the first, the causes that affect the alterations in exchange rates besides affect the alteration in footings of trade because monetary values of goods do non set to unclutter the markets.

This reading besides found in the research of Dornbusch ( 1976 ) , and Isard ( 1977 ) , the analysis officially differentiates the system with regard to interchange rates and let monetary values to alter but non the altering in plus stocks. The reading presented the snap attack of the foreign exchange market and the relation between the trade and exchange rates.

Real supply and demand dazes affect monetary values and the derived demand of exchange rates. These alterations in demand for foreign exchange result the supply and demand dazes and that should impact the equilibrium of exchange rates. In 2nd reading the expected rate of alteration of exchange rates revealed on the forward foreign exchange market.

This should be related the awaited alteration in the footings of trade and the rising prices derived functions. A persuasive statement about the degree of exchange rates is merely associated with non causes of the comparative monetary values alterations.

Bilson ( 1985 ) gives the empirical findings about macroeconomic and flexible exchange rate of the U.S dollar related to PPP theory. From the position of this research, the sulky monetary value accommodation in the trade good markets resulted in increased variableness in exchange rates.

For the presentation of consequence it is of import because the instability of drifting exchange rate is due to the built-in differences between trade good and foreign exchange markets. The finding of the expected hereafter rate is impossible, because it is more hard to reject the forward para status.

The major portion of the forward para is the fluctuation in the premium is due to the prognosis. The object of this survey is to find that if the forward para failed is the cause of instability in the same manner that the failure of buying power para. The findings develop that currency hazard premium is the of import factor comparative to drifting rate system, and motion in the exchange rate are dominated by the non bad activity and it has the inauspicious consequence on universe economic system.

Meese and Rogoff ( 1983 ) analyzed the result of sample calculating truth on assorted theoretical accounts. The survey estimated the skylines of the dollar with different state currencies, like Dutch grade, Nipponese hankering, and Britain lb that traded to burden the dollar exchange rates.

It has besides studied the flexible exchange rates with the pecuniary theoretical accounts of gluey monetary value, so the theoretical account of gluey monetary value, which incorporates the current history. The first theoretical account is structural theoretical accounts in which it requires to bring forth the prognosiss of exchange rates and explanatory variables. It contains the explanatory power, but it is predicted severely because the explanatory variables are hard to foretell.

The 2nd is the univariate clip series theoretical account in which it identifies a assortment of prefiltering techniques involves differencing, de-seasonalizing and removing clip tendencies. The comparative public presentation of these techniques is of involvement in itself. The 3rd theoretical account usage is the random walk theoretical account. It is besides linked with this univariate clip series theoretical account.

It is used as the forecaster of the current topographic point rate with the full hereafter topographic point rate, and it requires no appraisal. In this survey the public presentation of estimated univariate clip series theoretical accounts or candidate structural theoretical account is no good alternatively it is worst. From a methodological base point the position that the result of sample theoretical account tantrum is an of import standard when measuring exchange rate, but the appraisal of out of sample is failure with clip series theoretical accounts that are good approximated the major state exchange rates.

Feinberg and Kaplan ( 1992 ) evaluated and interact the existent exchange rates index outlooks is developed and used to research the function of finding on domestic manufacturer monetary values. The fact that clip way of the exchange rate has straight affected the input costs, and the monetary value of replacements strongly.

To analyze the links between both existent and awaited motions in the dollar and comparative domestic manufacturer monetary values, it chooses to analyse monetary value responses to existent exchange rate alterations. The consequence is dependent on the nature of replaceability between imports and domestic goods.

The major determination is that the period of grasp and depreciation over the past 10 old ages to suppress the base on balls through in to domestic monetary values. In depreciation the market portion to bask the continued good times kept monetary values other than expected.

The theory of optimal currency countries, which is normally presented by the other name called flexible exchange rate system, but it is proponent as a device of depreciation that takes topographic point of unemployment when the balance of payment is shortage and grasp when it replaces rising prices when it is excess.

The job can be exposed and more revealed by specifying a currency country within when exchange rates are fixed. Three replies can be given, foremost certain parts of the universe are traveling through the procedure of economic integrating, so new experience can be made and what constitutes the optimal currency country can be given the significance of these experiments.

Second those states that have flexible exchange rates are likely to confront jobs with the theory of optimal currency countries, so these do non co-occur the optimal currency countries with the national currency. Third the thought that illustrates the maps of currencies which have been treated in economic literature, and sometimes neglected in the jobs of economic policy.

In the currency country, states with different currencies including national state currencies interact gait of employment in shortage, because there is the presence of rising prices in the excess states. The statement for flexible exchange rate system is based on national currencies, and is valid about mobility of factor, so if it is high in the state and low in the foreign states, the flexible exchange rates system on place state currencies has to work efficaciously.

The construct of optimal currency country has practically applicable merely in those countries, where the province has the political organisation in the state. The factor mobility is most considered and is more comparative instead than absolute construct, with both industrial and geographical factors.

It is likely to alter the changes with clip over clip in conditions, with the conditions of political and economic stableness. Money is the convenience that restricts the optimal figure of currencies, so in footings of this statement the optimal currency country which is composed in figure of states ( Mundell, 1961 ) .

In another reappraisal, the writer defines the stabilisation of capital mobility policy under the exchange rates which is fixed and flexible in the currencies markets. It concerns the theoretical and practical attack of the increased mobility of capital.

Obstfeld and Rogoff ( 1995 ) analyses the planetary macroeconomic kineticss to provide model based on competition and nominal monetary values. This survey incorporates the monetary values rigidities that explain exchange rate behaviour without penetrations of the intertemporal attack to the current history. The effects of macroeconomic policies on end product and exchange rates have non been yet persuaded to abandon.

The model which incorporate exchange rates kineticss and current history outputs is a new position, it realize that when monetary values are gluey the authorities should pass on daze rises short tally end product and long tally end product.

The premise is that place and foreign authorities purchases the ingestion goods that do non straight affect the private public-service corporation, but the per capita existent authorities ingestion outgo is a composite ingestion of single goods.

It explains that the composite ingestion for the services is to equilibrate the chance cost and notice that the money depends on ingestion instead than income, that differentiation is more of import in closed economic systems. The consequences of this survey develop model that give new foundations about some of the basicss jobs in international finance.

It realizes that the bing Keynesian theoretical account is uncomplete to offer a satisfactory intervention of exchange rates, end product and the current history, but the theoretical account which is used in this survey is more complex, because it yields simple and intuitive penetrations of pecuniary and financial policies.

It can be extended in a figure of dimensions, including non traded goods, market behaviour, authorities disbursement, and labour market deformations and so on. It goes beyond the basically statistical attack that handles the current history and exchange rates issues, most significantly this attack allows to analyse the public assistance deductions of policies.

Melvin ( 1985 ) has regarded and focused that how the pick of an exchange rate system can impact the stableness of the economic system. The appropriate nature of the exchange rate system has differed of the perturbation to the economic system. It presented the grounds that indicate that the attack is more consistent harmonizing to pattern by existent state.

The other attack is to make the desirable monetary value stableness, in which some mechanism tells the drifting rates high quality has become less in the face of pecuniary dazes. It finds that the flexibleness in exchange rates depends non on openness and less of import in the mobility of capital, but its positive effects were found for the economic development.

The intent of this survey is to see the determiners of exchange rates system pick, which indicates the theoretical attack with the state picks. The consequence found that the pick of an exchange rate system has the function of the perturbation to the economic system.

It suggests that the money dazes are the key of exchange rate system pick in an economic system, in which it seeks to minimise the fluctuations in the state monetary value degrees. It besides suggests that the greater the monetary value shocks the more is a float, so it affects greatly domestic money dazes.

Lothian and Taylor ( 1996 ) examines the existent exchange rate behaviour, and explains the fluctuations in sample of stationary univariate equations in existent exchange rates. The survey investigates the extra penetration in the exchange rates behavior that can be gained by sing the drifting rate from the position of the informations.

These issues can be best understood on the topic of existent exchange rates stability between the currencies of the major industrialised states. Some of the pre-float surveies support the reasonably stable exchange rates in the long tally. Subsequently, Dornbusch ( 1976 ) , and Frenkel ( 1981 ) , gave mostly as the consequence of surveies published, and reject the hypothesis of random walk behaviour of existent exchange rates.

The PPP shows the empirical motions in existent exchange rates were extremely relentless and effectual. Although the PPP is reject the hypothesis of non-stationary behaviour of existent exchange rates in the long tally. The consequence of this survey shows that the longest span of two states exchange rates are significantly average backsliding.

The first theoretical account consequence indicates the 80 per centum of the fluctuation in the exchange rates of the history informations of two states. By utilizing of another theoretical account, the consequences explicating the public presentation of unusually good in the natation, so that this theoretical account produce better prognosiss of the existent exchange rates.

In line with recent surveies, it fined that this procedure of mean backsliding is quit slow, with estimated accommodation of informations. In the long tally the PPP equilibrium is staying a utile empirical estimate.

Gerlach ( 1988 ) examine the dynamic interrelatedness between inventions in monthly industrial production in a set of economic systems, specifically this survey attempt the end product fluctuations that have been correlated during the periods of fixed and flexible exchange rates.

The current has to pull off exchange rates flexibility that has reduces the mutuality across states. It should follow the recent article of Flood and Hodrick ( 1986 ) in which it is argued that the variableness have been higher during a government of fixed exchange rates alternatively of flexible exchange rates, but the decision of writer is striking so aggressively.

The consequences of this survey of multiple state end product motions under fixed and flexible exchange rates are clear. The discrepancies of growing rates should be higher in the flexible exchange rates and in the fixed exchange rates periods. These discrepancies are statistically important related to the grade of openness and national income.

Third the end product motions are correlated across states under exchange rate government, peculiarly the carbon monoxide motions in end product are more of import in the concern rhythm often during the recent old ages of managed exchange rates flexibleness.

Chapter 3: Research METHODS

3.1 Method of Data Collection

The Data of Consumer monetary value index ( Inflation ) has been collected from federal agency of statistics while the informations of exchange rate has been collected from Pacific Exchange Rate Service, both are the secondary, published beginning of informations.

3.2 Sampling Technique

The sampling technique that has been applicable is “ convenience sampling ” as it is easy accessible to roll up the relevant information from the beginning and it is cheap and therefore, gets a gross estimation of the consequences. ( What is The Advantage of Convenience Sampling, 2007-2010 ) .

3.3 Sample size

The sample size is selected on the footing of restrictions and range of the research therefore, Last 54 old ages ie, 1947 – 2010, informations of rising prices and exchange rate is decided to be examined.

3.4 Research Model developed

From the above defined and accounts of both the dependent i.e. rising prices and independent i.e. exchange rates variables and besides discoursing the effects of exchange rate on rising prices and how it have affects on economic of a state. In this survey first analysis is the correlativity between these two variables, and identifies the important relationship. Then it analyzes and evaluates the empirical probe in arrested development theoretical account as a statistical tool. The simple arrested development theoretical account which can be defined in the equation that represented below:

Inflation = I??? + I? ( exchange rate ) + Iµ

Whereas,

I??? = the intercept of the equation.

I? ( exchange rate ) = the altering coefficient of exchange rate.

Iµ = the error term of the equation.

From the above explained theoretical account, the survey develop the undermentioned appraisal and used for the constitution of the theoretical account. Therefore, all the compatible information has entered in to SPSS for statistical analysis.

3.5 Statistical Technique

The statistical trial that has been applied is individual additive arrested development. This is because merely one independent variable and one dependant variable to be used in this research.

Frankel ( 1979 ) defined that most of the recent work on drifting exchange rate goes under the name of the pecuniary or plus position. The exchange rate is traveling to equilibrate the international demand for assets, instead than the international demand for the flow of goods.

But with the plus position there is ‘Chicago Theory ‘ in which assumes that monetary values are absolutely flexible. As the effects when nominal involvement rate alterations, it has besides reflect the alterations in expected rising prices rate, so as the domestic currency expected to lose value through rising prices and depreciation. This is the rise in the exchange rates and gets the positive relationship between positive exchange rate and rising prices.

Chapter 4: Consequence

4.1 Findingss and Interpretation of the consequence

The simple additive arrested development technique is used to find the account of dependent variable i.e. rising prices due to independent variable i.e. exchange rate. The analysis of the consequence is defined below:

Table – 4.1 Model Summary

Model

R Square

Adj. R Square

F

Sig.

1

.173

.156

10.641

.002

The tabular array – 4.1 shows that the arrested development theoretical account is best fit to foretell as F trial value is important. The fluctuation of arrested development theoretical account is explained by 17.3 % i.e. the alteration in rising prices is 17.3 % by the exchange rate.

Table -4.2 Coefficients

Model

Un-standardized

Coefficients

Standardized

Coefficients

Thymine

Sig.

Bacillus

Std. Mistake

Beta

1 ( Constant )

Exchange Rate

123.346

.694

6.963

.213

.415

17.714

3.262

.000

.002

Table – 4.2 the coefficients consequences show that there is the positive association between exchange rates with related to rising prices in Pakistan. The consequences reflect that the exchange rates beta has the positive value and the T-value of both the variables is important statistically at 0.05.

From the above applied arrested development theoretical account, the consequence concludes in the manner that it explains the relationship of both the dependant and independent variables significantly.

The Inflation and exchange rates result shows that the beta value of the variable and T-value is important at the 0.000 degree. So the consequences conclude that the exchange rates value should significantly play its function in the relationship with related to rising prices, but the exchange rates should non separately play a important function in the relationship with rising prices. The hypothesis is non rejected and that the exchange rate explains the rising prices by 17.3 % . The equation of arrested development theoretical account is written below:

Inflation = 123.346 + 0.694 ( exchange rate ) + Iµ

4.3 Hypothesis Assessment Summary

Hypothesis

R Square

F

Sig.

Regression Coefficient I?

Thymine

Empirical Decision

Exchange rate explains rising prices.

.173

10.641

P & lt ; 0.05

.694

3.262

Accepted

The hypothesis of this survey is that exchange rate explains the rising prices, which is being accepted and exchange rate is explicating rising prices by 17.3 % .

These findings support to recent theories that suggested the foreign exchange market efficiency with the being of hazard at equilibrium. Wihlborg ( 1982 ) examined the relation of involvement rates, exchange rate and currency hazards in this survey. It identifies the trial which through empirical observation shows the impact of currency on involvement rates and exchange rates. In this survey there are three different ways in which the importance of currency hazards for involvement rate and exchange rate finding. The consequences presented here that substantiate the alterations in the degree of currency hazard have a non-negligible impact on the alterations of exchange rates and on rates of involvement of comparative between currencies.

Chapter 5: Decision, DISCUSSIONS, IMPLICATIONS AND FUTURE RESEARCH

5.1 Decision

This survey is concluded to analyze the dependence of exchange rate on rising prices by utilizing the information of consumer monetary value index ( CPI ) as rising prices and the informations of exchange rate on annual footing.

The consequence of this survey is extremely important so that the hypothesis of this survey is non rejected. The consequence shows that 17.3 % fluctuation in rising prices is due to the exchange rate in Pakistan. The analysis of this survey besides shows that if exchange rate becomes zero, the rising prices exist to some extent. For illustration, if one unit of exchange rate additions, the rising prices increases merely by 0.693 times.

5.2 Discussions

This survey has applied exchange rate as independent variable and consumer monetary value index ( CPI ) as dependant variable. For the handiness of informations, all the informations should be available on day-to-day monthly and annual footing, but the information is used in order to consistent as annual footing. The arrested development theoretical account has been formulated for these variable relationship probes. The survey developed the hypothesis that the exchange rate explains the rising prices in Pakistan, and the findings are supported by the analysis done by Balassa ( 1964 ) , Meese & A ; Rogoff ( 1983 ) , Frankel ( 1979 ) , and Mc Callum ( 1999 ) etc.

5.3 Deductions and Future Research

The consequence besides accompanies that the exchange rates are the strength of character of foreign exchange market in Pakistan, and it should consequence on each of the related variables as an inflationary footing. Therefore the State Bank of Pakistan and Government functionaries should recognize the function of exchange rates in the economic system and seek to keep exchange rates to halt or diminish the consumer monetary value index in Pakistan, so that the monetary value scope of every thing should be in scope of common work forces.

Besides authorities should turn to the issues that why exchange rates increasing, and why the consumer monetary value additions due to foreign exchange volatility. If the Government takes effectual actions against these issues so it can besides ease the investors to derive assurance in the foreign exchange market and local currency value is strong from other foreign currencies. This has turned Pakistani currency to be stronger, and which has boost the economic growing.

In this survey, merely exchange rate is taken to foretell rising prices in Pakistan. But in the state like Pakistan rising prices is predict by the assorted variables like involvement rate, money supply, foreign trade and so on. So in the hereafter research other variables should be included.