Net Portfolio Investment Inflows to Pakistan: Does Exchange Rate Volatility Matter?

Abstract

This study investigates the impact of exchange rate volatility on net portfolio investment flows to Pakistan, utilizing quarterly data for the period of 1994Q3 to 2022Q4. We use ARDL model for the analysis.  The unit root test results suggest that a few variables are stationary at their level and some are first order integrated (stationary at their first difference), but none of them is second or higher order integrated. The ARDL bound test results validate the existence of long-term relationship among the variables. The findings of the study reveal that in the short run domestic inflation has positive impact on net portfolio investment balance, while domestic industrial production index, interest rate differential, stock price and exchange rate volatility impact net portfolio investment balance negatively in Pakistan. Further, in the long run, domestic industrial production index and interest rate differential cast favourable impact on net portfolio investment balance, while domestic inflation, exchange rate volatility, real effective exchange rate and stock prices have negative and significant effect on net portfolio investment position of Pakistan. Grounded on the findings of the study, we recommend that the policymakers should take suitable measures to control exchange rate volatility in order to improve net portfolio investment position of the country.