IDEAS home Printed from https://ideas.repec.org/a/erh/journl/v6y2014i2p58-76.html
   My bibliography  Save this article

Modelling Exchange Rate Volatility by Macroeconomic Fundamentals in Pakistan

Author

Listed:
  • Munazza Jabeen

    (International Institute of Islamic Economics, International Islamic University Islamabad, Pakistan.)

  • Saud Ahmad Khan

    (National University of Sciences and Technology.)

Abstract

What drives volatility in foreign exchange market in Pakistan? This paper undertakes an analysis of modelling exchange rate volatility in Pakistan by potential macroeconomic fundamentals well-known in the economic literature. For this, monthly data on Pak Rupee exchange rates in the terms of major currencies (US Dollar, British Pound, Canadian Dollar and Japanese Yen) and macroeconomics fundamentals is taken from April, 1982 to November, 2011. The results show thatthe PKR-USD exchange rate volatility is influenced by real output volatility, foreign exchange reserves volatility, inflation volatility, and productivity volatility. The PKR- GBP exchange rate volatility is influenced by foreign exchange reserves volatility and terms of trade volatility. The PKR- CAD exchange rate volatility is influenced by terms of trade volatility. The findings of this paper reveal that exchange rate volatility in Pakistan results from real shocks rather than nominal shocks.

Suggested Citation

  • Munazza Jabeen & Saud Ahmad Khan, 2014. "Modelling Exchange Rate Volatility by Macroeconomic Fundamentals in Pakistan," International Econometric Review (IER), Econometric Research Association, vol. 6(2), pages 58-76, September.
    • Handle: RePEc:erh:journl:v:6:y:2014:i:2:p:58-76
    as

    Download full text from publisher

    File URL: http://www.era.org.tr/makaleler/12080099.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Devereux, Michael B. & Lane, Philip R., 2003. "Understanding bilateral exchange rate volatility," Journal of International Economics, Elsevier, vol. 60(1), pages 109-132, May.
    2. Chrysost Bangaké, 2008. "Exchange Rate Volatility and Optimum Currency Area: Evidence from Africa," Economics Bulletin, AccessEcon, vol. 6(12), pages 1-10.
    3. Flood, Robert P. & Rose, Andrew K., 1995. "Fixing exchange rates A virtual quest for fundamentals," Journal of Monetary Economics, Elsevier, vol. 36(1), pages 3-37, August.
    4. Leonardo Bartolini & Gordon M. Bodnar, 1996. "Are Exchange Rates Excessively Volatile? And What Does "Excessively Volatile" Mean, Anyway?," IMF Staff Papers, Palgrave Macmillan, vol. 43(1), pages 72-96, March.
    5. Muhammad Kashif Ali Shah & Zulfiqar Hyder & Muhammad Khalid Pervaiz, 2009. "Central bank intervention and exchange rate volatility in Pakistan: an analysis using GARCH-X model," Applied Financial Economics, Taylor & Francis Journals, vol. 19(18), pages 1497-1508.
    6. Maria Grydaki & Stilianos Fountas, 2009. "Exchange Rate Volatility and Output Volatility: A Theoretical Approach," Review of International Economics, Wiley Blackwell, vol. 17(3), pages 552-569, August.
    7. Morana, Claudio, 2009. "On the macroeconomic causes of exchange rate volatility," International Journal of Forecasting, Elsevier, vol. 25(2), pages 328-350.
    8. Bayoumi, Tamim & Eichengreen, Barry, 1998. "Exchange rate volatility and intervention: implications of the theory of optimum currency areas," Journal of International Economics, Elsevier, vol. 45(2), pages 191-209, August.
    9. Stockman, Alan C. & Stockman, Alan C., 1983. "Real exchange rates under alternative nominal exchange-rate systems," Journal of International Money and Finance, Elsevier, vol. 2(2), pages 147-166, August.
    10. Goyal, Ashima & Arora, Sanchit, 2012. "The Indian exchange rate and Central Bank action: An EGARCH analysis," Journal of Asian Economics, Elsevier, vol. 23(1), pages 60-72.
    11. Yin-Wong Cheung & Kon S. Lai, 2009. "A Multiple-Horizon Search for the Role of Trade and Financial Factors in Bilateral Real Exchange Rate Volatility," Journal of Economics and Management, College of Business, Feng Chia University, Taiwan, vol. 5(2), pages 187-218, July.
    12. Fidrmuc, Jarko & Horváth, Roman, 2008. "Volatility of exchange rates in selected new EU members: Evidence from daily data," Economic Systems, Elsevier, vol. 32(1), pages 103-118, March.
    13. Hau, Harald, 2002. "Real Exchange Rate Volatility and Economic Openness: Theory and Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(3), pages 611-630, August.
    14. Obstfeld, Maurice & Rogoff, Kenneth, 1995. "Exchange Rate Dynamics Redux," Journal of Political Economy, University of Chicago Press, vol. 103(3), pages 624-660, June.
    15. Luc Bauwens & Dagfinn Rime & Genaro Sucarrat, 2008. "Exchange rate volatility and the mixture of distribution hypothesis," Studies in Empirical Economics, in: Luc Bauwens & Winfried Pohlmeier & David Veredas (ed.), High Frequency Financial Econometrics, pages 7-29, Springer.
    16. repec:ebl:ecbull:v:6:y:2008:i:12:p:1-10 is not listed on IDEAS
    17. Mr. M. Nowak & Mr. Ketil Hviding & Mr. Luca A Ricci, 2004. "Can Higher Reserves Help Reduce Exchange Rate Volatility?," IMF Working Papers 2004/189, International Monetary Fund.
    18. Hua, Mingshu & Gau, Yin-Feng, 2006. "Determinants of periodic volatility of intraday exchange rates in the Taipei FX Market," Pacific-Basin Finance Journal, Elsevier, vol. 14(2), pages 193-208, April.
    19. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-1176, December.
    20. Hausmann, Ricardo & Panizza, Ugo & Rigobon, Roberto, 2006. "The long-run volatility puzzle of the real exchange rate," Journal of International Money and Finance, Elsevier, vol. 25(1), pages 93-124, February.
    21. Mussa, Michael, 1986. "Nominal exchange rate regimes and the behavior of real exchange rates: Evidence and implications," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 25(1), pages 117-214, January.
    22. Jonathan Chipili, 2012. "Modelling Exchange Rate Volatility in Zambia," The African Finance Journal, Africagrowth Institute, vol. 14(2), pages 85-107.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Trust R. Mpofu, 2021. "The determinants of real exchange rate volatility in South Africa," The World Economy, Wiley Blackwell, vol. 44(5), pages 1380-1401, May.
    2. Ghouse, Ghulam & Khan, Saud Ahmed & Arshad, Muhammad, 2015. "Time Varying Volatility Modeling of Pakistani and leading foreign stock markets," MPRA Paper 70080, University Library of Munich, Germany.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. repec:erh:journl:v:6:y:2014:i:2:p:59-77 is not listed on IDEAS
    2. Trust R. Mpofu, 2021. "The determinants of real exchange rate volatility in South Africa," The World Economy, Wiley Blackwell, vol. 44(5), pages 1380-1401, May.
    3. Maria Grydaki & Stilianos Fountas, 2010. "What Explains Nominal Exchange Rate Volatility? Evidence from the Latin American Countries," Discussion Paper Series 2010_10, Department of Economics, University of Macedonia, revised Jul 2010.
    4. Calderón, César & Kubota, Megumi, 2018. "Does higher openness cause more real exchange rate volatility?," Journal of International Economics, Elsevier, vol. 110(C), pages 176-204.
    5. Eichler, Stefan & Littke, Helge C. N., 2017. "Central bank transparency and the volatility of exchange rates," IWH Discussion Papers 22/2017, Halle Institute for Economic Research (IWH).
    6. Eichler, Stefan & Littke, Helge C.N., 2018. "Central bank transparency and the volatility of exchange rates," Journal of International Money and Finance, Elsevier, vol. 89(C), pages 23-49.
    7. Grossmann, Axel & Love, Inessa & Orlov, Alexei G., 2014. "The dynamics of exchange rate volatility: A panel VAR approach," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 33(C), pages 1-27.
    8. Grossmann, Axel & Orlov, Alexei G., 2022. "Exchange rate misalignments, capital flows and volatility," The North American Journal of Economics and Finance, Elsevier, vol. 60(C).
    9. Yin-Wong Cheung & Kon S. Lai, 2009. "A Multiple-Horizon Search for the Role of Trade and Financial Factors in Bilateral Real Exchange Rate Volatility," Journal of Economics and Management, College of Business, Feng Chia University, Taiwan, vol. 5(2), pages 187-218, July.
    10. Aghion, Philippe & Bacchetta, Philippe & Rancière, Romain & Rogoff, Kenneth, 2009. "Exchange rate volatility and productivity growth: The role of financial development," Journal of Monetary Economics, Elsevier, vol. 56(4), pages 494-513, May.
    11. Ganguly, Srideep & Breuer, Janice Boucher, 2010. "Nominal exchange rate volatility, relative price volatility, and the real exchange rate," Journal of International Money and Finance, Elsevier, vol. 29(5), pages 840-856, September.
    12. Weber, Christoph S., 2019. "The effect of central bank transparency on exchange rate volatility," Journal of International Money and Finance, Elsevier, vol. 95(C), pages 165-181.
    13. Oleg Itskhoki & Dmitry Mukhin, 2021. "Exchange Rate Disconnect in General Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 129(8), pages 2183-2232.
    14. Luca Dedola & Sylvain Leduc, 2002. "Why are business cycles alike across exchange-rate regimes?," Working Papers 02-11, Federal Reserve Bank of Philadelphia.
    15. John H. Rogers, 1995. "Real shocks and real exchange rates in really long-term data," International Finance Discussion Papers 493, Board of Governors of the Federal Reserve System (U.S.).
    16. Hossain, Monzur, 2010. "Do Currency Regime and Developmental Stage Matter for Real Exchange Rate Volatility? A Cross-Country Analysis," Bangladesh Development Studies, Bangladesh Institute of Development Studies (BIDS), vol. 33(4), pages 1-22, December.
    17. Michael Bleaney & Mo Tian, 2012. "Currency Networks, Bilateral Exchange Rate Volatility and the Role of the US Dollar," Open Economies Review, Springer, vol. 23(5), pages 785-803, November.
    18. Maurice Obstfeld, 1995. "Intenational Currency Experience: New Lessons and Lessons Relearned," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(1, 25th A), pages 119-220.
    19. Simrit Kaur & Aditya Vikram, 2013. "Economic impact of trade openness and exchange rate regimes: evidence from developing Asia," International Journal of Business and Emerging Markets, Inderscience Enterprises Ltd, vol. 5(4), pages 341-370.
    20. Luca Dedola & Sylvain Leduc, 1999. "On exchange rate regimes, exchange rate fluctuations, and fundamentals," Working Papers 99-16, Federal Reserve Bank of Philadelphia.
    21. Przemek Kowalski & Wojciech Paczynski & Lukasz Rawdanowicz, 2003. "Exchange rate regimes and the real sector: a sectoral analysis of CEE Countries," Post-Communist Economies, Taylor & Francis Journals, vol. 15(4), pages 533-555.

    More about this item

    Keywords

    Exchange Rate Volatility; GARCH.;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:erh:journl:v:6:y:2014:i:2:p:58-76. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: M. F. Cosar (email available below). General contact details of provider: https://edirc.repec.org/data/eratrea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.