The Impact Of Inflation And Monetary Policy On Exchange Rate: A Case Study Of Pakistan

The recent continuous depreciation of the Pakistani rupee has sparked debate over the causes of this phenomenon. Inflation and monetary policy have been popular suspects. The research focuses on how monetary policy and inflation affect exchange rates. This study used a data set collected from the WDI, IMF and Pakistan economic survey that covered the years 1980 to 2019. The dynamics of the short and long term of the correlation were investigated using an ARDL model and a Bounds test of cointegration. The findings show that tight monetary policy has a long-run depreciating effect on the local currency, regardless of the monetary policy tool utilized. Inflation as predicted, depreciates the currency over time. The results of the causality test show that monetary policy and inflationdo have an effect on exchange rate. It also demonstrates bidirectional inflation and exchange rate correlations as for inflation and money supply. This thesis recommends keeping exchange rate stable, more focus should be placed on inflation control. Money supply has also become highly significant in this model. This suggests that the State bank of Pakistan should maintain a sharp look on the excess money supply to keep inflation under control and the rupee stable.