Abstract

This paper is explores the reasons behind the devaluation of Pakistani currency with respect to US $ and answer these questions that, Is interest rate and inflation difference having relationship with exchange rate? Either Exchange rate effect economic growth positively or negatively? Is current account deficit and public debt are determinant of exchange rate? It also checks that how exchange rate fluctuation affects economic growth by evaluating the GDP using data over period of 11 years (2001-2011) of Pakistan. For this purpose we evaluated some of the past literatures on exchange rate, its aim to point out several factors that explains the reason behind Pakistani currency devaluation and its exchange with other currencies specially with US $. The result shows how these determinants fluctuates exchange rate, inflation differential; current account deficit, public debt and interest rate differential are most important determinants which have major impact on exchange rate.We got the resultant that GDP, interest rate, inflation rate and current account affected exchange rate fluctuation but the major and important role played by GDP.