Linkages between exchange rate and economic growth in Pakistan (an econometric approach)

Abstract

Exchange rate has remained a debatable issue in association with economic growth; a very little common consensus could be developed amongst policy makers and economists. There is no unambiguous theoretical evidence which explains the impact of exchange rate on economic growth; in fact, both theories and evidences are diverging. Most of the theories are emphasizing on explaining indirect relation between exchange rate and economic growth as exchange rate stimulates growth in terms of exports, investment and foreign direct investment (FDI). This study is an attempt to explore the relationship between exchange rate and economic growth in Pakistan for period 1976–2010. Using simultaneous equation model, employing two, three stage least square (2SLS and 3SLS) techniques and found that exchange rate has a positive association with economic growth through the channel of export promotion incentives, enlarging the volume of investment, enhancing FDI inflow and promoting import substitute industry. Although, exchange rate is positively affecting economic growth, yet it can’t be used as a policy tool.