Impact of Trade, Workers Remittances and Quasi Money on Volatility of Exchange Rate

Abstract

This paper addresses one of the core issues of Pakistan i.e. the volatility of exchange rate in the light of various determinants like the impact of trade, FDI, worker’s remittances, money and quasi money (M2). Using a time series from 1976-2015 and by applying Johansen and Juselius (1990) cointegration technique, the results confirmed the presence of long run relationship among these variables. For the short run relationship the study employs Vector Error Correction Model (VECM). The estimation results show that these variables are cointegrated in short run as well. Moreover, VECM coefficient indicated that more than 10% of the disequilibrium in the volatility of exchange rate can be adjusted towards long run equilibrium annually and the time required for this approximately nine years and six months.  Findings also show that except Trade, all other variables i.e. FDI, Remittances and Money supply are affecting positively to the exchange rate volatility in Pakistan.