Exchange Rate Response of Import Demand in Pakistan

Exchange rate policy has assumed an added importance in recent years due to changing global economic conditions. This paper has examined the foreign exchange reserves, real and effective exchange rate response of imports demand in Pakistan using both classical and time series econometrics approaches. The real depreciation of the exchange rate has been found to have dampening impact on import demand. Adoption of a realistic exchange rate is highly desirable. Domestic inflation and an unrealistic exchange rate may discourage the investment flows needed to the new incentives. A stable and long-run relationship exists between imports and GDP, effective exchange rate and relative import prices. Cointegration results do not support the long-run equilibrium situation between imports; and foreign exchange reserves and real exchange rate.