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Impact On Exchange Rate Due To Inflation and Interest:: Sinificance of Study

1) The document discusses the relationship between exchange rates, interest rates, and inflation in Pakistan. Fluctuations in the exchange rate are a major problem in Pakistan due to devaluation of the Pakistani rupee and fluctuations in interest rates. 2) The objective of the research is to understand and explain the causal relationship between the macroeconomic variables of inflation, interest rates, and exchange rates in Pakistan. It aims to determine which variables affect exchange rates and how monetary policies can control fluctuations. 3) The methodology will develop hypotheses about the relationships between interest rates and exchange rates and inflation and exchange rates. It will then use OLS regression models to analyze the data and interpret the results.

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49 views5 pages

Impact On Exchange Rate Due To Inflation and Interest:: Sinificance of Study

1) The document discusses the relationship between exchange rates, interest rates, and inflation in Pakistan. Fluctuations in the exchange rate are a major problem in Pakistan due to devaluation of the Pakistani rupee and fluctuations in interest rates. 2) The objective of the research is to understand and explain the causal relationship between the macroeconomic variables of inflation, interest rates, and exchange rates in Pakistan. It aims to determine which variables affect exchange rates and how monetary policies can control fluctuations. 3) The methodology will develop hypotheses about the relationships between interest rates and exchange rates and inflation and exchange rates. It will then use OLS regression models to analyze the data and interpret the results.

Uploaded by

kaif0331
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOC, PDF, TXT or read online on Scribd
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Impact on exchange rate due to inflation

and interest:
Introduction:
Exchange rate, Interest rates and inflation are three important drivers of
any economy. The exchange rate provides a key link between a country
and the rest of the world, both in goods and assets markets. Strong
currency is an indicator of a strong economy. Currency exchange rates are
determined everyday in large global currency exchange markets. There is
no fixed value for any of the major currency -- all currency values are
described in relation to another currency. The relationship between interest
rates, and other domestic monetary policies, and currency exchange rates is
complex, but at the core it is all about supply and demand. A major root
cause of inflation is excessive supply of money in an economy. This
causes price hike in an economy which reduces the purchasing power of a
currency. Interest rates are the rates at which one can borrow or lend the
money in an economy. Interest rates are also used to control the inflation
of the economy. High interest rates discourage the money supply and
encourage savings.

Sinificance of study:
Fluctuation in exchange rate is an important issue in Pakistan. The main
reason of this problem in Pakistan devaluation of pak rupee. The second
reason is fluctuation in interest rate. we have choose the research on this
current issue because this problem is rapadily increase in Pakistan and
unfortunately less work is done on this issue . Higer exchange rate is a bad
sign in any economy. I want to highlight the basic roots of this problem.
because of this our trade become deficit and we face heavy losses.
Objective :
The main objective of my research is to understand the fluctuation in
exchange rate . Highlight the variables which effect the exchange rate. The
basis objective of my study is to explain the causal relationship between the
macroeconomic variable.(Inflation , interest rate, exchange rate)Second
objective is how this issue can be resolve and what monetary polices should
be adoped To control this problem and how a country stable its exchange
rate.

METHODOLOGY: on the basis of previous literature


following hypothesis has been developed. And on this bais of this hypothesis
we check the significance of the variables then we will apply the OLS
MODEL and after it we will be able to interpret the results how much
independent variables effect the dependent variables.

 Hypothesis 1:

H0: There is no relation between interest rate and exchange rate.

 Hypothesis 2:

H0: There is no relation between inflation and exchange rate.


The following equation shows the mathematical relation of dependent and independent
variable.

E =error term

e
Literature
Review

Information plays an important role to change the business scenario and it


also change the expectation of the people regarding market. Therefore
foreign investors require more return if risk is more to relative country. Such
information is perceived from different macroeconomic variables. For
example, information related uncovered interest rate can change the
exchange rate and risk premium between two countries . Macroeconomic
variables can change the economic phenomenon as well as it leads to change
the exchange rate at domestic level. Nominal or real change in the interest
rate is the main important feature of the monetary policy and it reason to
change the exchange rate. In addition, the positive change in real or nominal
interest at domestic level can appreciate the exchange rate at domestic level
and vice verse. However, information regarding macroeconomic variables
can be divided into two types whether it is strong or weak. But strong
announcement of macro economic variables reason to appreciate the
exchange rate. Although in long run there is a co movement in interest and
exchange rate and this movement also leads to require the risk premium .
Moreover, daily intervention by central economic authority also set the
exchange rate but the benefit can be achieved for short term not for long
term. Subsequently, economic news related macroeconomic variables like
interest; inflation and monetary policy increase or decrease the value of the
currency. In addition, positive change in fundamental of the economy can
appreciate the value of currency while unexpected negative change in the
economic variable leads to decrease the value the domestic currency .
Consequently, variation in inflation also changes the spot and forward
exchange rate while it depends upon direction of the inflation of one country
to other country. In addition, it is observed positive change in exchange rate
if direction of inflation in two countries is same but domestic in
macroeconomic variable and exchange rates are positively correlated but it
depends upon the time duration. Accordingly, inflation and interest rate both
have negative relation with nominal exchange rate.

Reference:
Articles:
1. Rising inflation and declining value of the Pakistan rupee may bring disaster.

Written by: M. Osman Ghani

2. Factors That Influence Exchange Rates

Written by: Jason Van Bergen

TERM PAPER:

Do Interest Rate, Exchange Rate effect Stock Returns?


Pakistani Perspective

Muhammad Ishfaq Ahmad


Junior Lecturer, Lahore Business School, The University of
LahoreE-mail: [email protected]

Websites:
Www google.com
www. Exchange Rate.com
BOOK NAME :

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