The Effect of Monetary Policy on Import, Export, and Foreign Direct Investment: An Empirical Investigation

Abstract

This study investigated the effect of monetary policy determinants upon Pakistani export, import, and foreign direct investment using annual data for the period 1980 to 2021. The Bond cointegration tests showed the existence of a long-term relationship among imports and the other variables. Upon analyzing the import model, it was discovered that in the short term, variables such as the exchange rate and money supply exert a significant influence on imports. Conversely, over a prolonged period, the currency rate, inflation rate, and money supply all exert positive and statistically significant impacts on imports. In the export model, the previous values of export and money supply had a favorable impact, though it was not statistically noteworthy. Conversely, the discount rate and exchange rate showed a detrimental effect, but it was not statistically significant. The inflation rate exerted a substantial and favorable influence on exports. Overall, the study's findings deepen our understanding of the complexities of global commerce and provide important perspectives for both policymakers and practitioners in properly overseeing trade agreements. The findings demonstrate the presence of enduring relationships between the variables and offer helpful information regarding the immediate and long-term effects of different variables on imports and exports. These insights are particularly crucial for comprehending the intricacies of monetary policy and trade policy within the specific framework of Pakistan.