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Impact of Exchange Market Forces on Pak-Rupee Exchange Rates during Globalization Period: An Empirical Analysis

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Author Info

  • Syed Adnan Haider Ali Shah Bukhari

    ()
    (Corresponding Author: Senior Research Fellow, Faculty of Computer Sciences and I.T. Department of Computer Sciences, FUUAST, Karachi, Pakistan.)

  • Muhammad Shahbaz Akmal

    ()
    (Research Scholar, Associate Professor/Senior Research Economist, Applied Economics Research Centre, Karachi University, Pakistan.)

  • Mohammad Sabihuddin Butt

    ()
    (Associate Professor/Senior Research Economist, Applied Economics Research Centre, Karachi University, Pakistan.)

Abstract

This paper analyzes the impact of exchange market forces on Pak-Rupee/US dollar exchange rates during the 1965-1971 globalization period. The main findings are that a) the behavior of Pakistan’s fundamentals relative to those of the USA help to explain exchange market forces against the Pak-Rupee; b) during the run up todevaluation in the globalization period the monetary authorities in Pakistan were acting to reduce domestic credit; but that c) additional pressurewas brought against the Pak-Rupee from speculative sources. These findings relate to current thinking on the choice of the exchange rate regime as even well behaved fundamentals may not be sufficient to sustain a currency on its peg.

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Bibliographic Info

Article provided by Department of Economics, The Lahore School of Economics in its journal Lahore Journal of Economics.

Volume (Year): 11 (2006)
Issue (Month): 1 (Jan-Jun)
Pages: 121-139

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Handle: RePEc:lje:journl:v:11:y:2006:i:1:p:121-139

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Keywords: Exchange market forces; pegged exchange rates; realignment expectations.;

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  1. Weymark, Diana N, 1998. "A General Approach to Measuring Exchange Market Pressure," Oxford Economic Papers, Oxford University Press, vol. 50(1), pages 106-21, January.
  2. Bertola, Giuseppe & Svensson, Lars E O, 1993. "Stochastic Devaluation Risk and the Empirical Fit of Target-Zone Models," Review of Economic Studies, Wiley Blackwell, vol. 60(3), pages 689-712, July.
  3. Krugman, Paul R, 1991. "Target Zones and Exchange Rate Dynamics," The Quarterly Journal of Economics, MIT Press, vol. 106(3), pages 669-82, August.
  4. Paul Hallwood, C. & MacDonald, Ronald & Marsh, Ian W., 2000. "Realignment expectations and the US dollar, 1890-1897: Was there a 'Peso problem'?," Journal of Monetary Economics, Elsevier, vol. 46(3), pages 605-620, December.
  5. Svensson, Lars E O, 1991. "The Simplest Test of Target Zone Credibility," CEPR Discussion Papers 493, C.E.P.R. Discussion Papers.
  6. Peel, David A & Taylor, Mark P, 2002. "Covered Interest Rate Arbitrage in the Interwar Period and the Keynes-Einzig Conjecture," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(1), pages 51-75, February.
  7. Bruce Mizrach, 1993. "Target zone models with stochastic realignments: an econometric evaluation," Research Paper 9302, Federal Reserve Bank of New York.
  8. Weymark, Diana N., 1995. "Estimating exchange market pressure and the degree of exchange market intervention for Canada," Journal of International Economics, Elsevier, vol. 39(3-4), pages 273-295, November.
  9. Shaista Alam & Muhammad Sabihuddin Butt & Azhar Iqbal, 2001. "The Long-run Relationship between Real Exchange Rate and Real Interest Rate in Asian Countries: An Application of Panel Cointegration," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 40(4), pages 577-602.
  10. Darvas, Zsolt, 1998. "Spurious Correlation in Exchange Rate Target Zone Modelling: Testing the Drift Adjustment Method on the US Dollar, Random Walk and Chaos," CEPR Discussion Papers 1890, C.E.P.R. Discussion Papers.
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