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Pakistan's Exchange Rate Policy: An Econometric Investigation

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  • Mohammad Ahmed

    (National Development Finance Corporation, Karachi.)

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    Abstract

    This paper examines empirical determinants of the Pakistani rupee exchange rate since the advent of the managed float in 1982. The behaviour of the nominal exchange rate results from policy intervention carried out by the monetary authorities. Various testable hypotheses are developed in order to discern the factor(s) which can be the determinants of the nominal rupee exchange rate. In the short run, authorities follow a contingent policy rule with respect to movements of the U. S. dollar against the SDR. Based on vector autoregression techniques, the error correction model is employed to check the consistency of the short-run adjustment process, given the authorities' long-run target rupee value. The 'revealed' policy is to partly offset the inflation differential between Pakistan and its major trading partners. Under plausible conditions, the burden of adjustment and recessionary conditions are likely to occur in the Pakistani export sector.

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    Bibliographic Info

    Article provided by Pakistan Institute of Development Economics in its journal The Pakistan Development Review.

    Volume (Year): 31 (1992)
    Issue (Month): 1 ()
    Pages: 49-74

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    Handle: RePEc:pid:journl:v:31:y:1992:i:1:p:49-74

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    1. Pagan, Adrian, 1985. "Time Series Behaviour and Dynamic Specification," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 47(3), pages 199-211, August.
    2. Sargan, John Denis & Bhargava, Alok, 1983. "Testing Residuals from Least Squares Regression for Being Generated by the Gaussian Random Walk," Econometrica, Econometric Society, vol. 51(1), pages 153-74, January.
    3. Granger, C.W.J. & Watson, Mark W., 1984. "Time series and spectral methods in econometrics," Handbook of Econometrics, in: Z. Griliches† & M. D. Intriligator (ed.), Handbook of Econometrics, edition 1, volume 2, chapter 17, pages 979-1022 Elsevier.
    4. Salmon, Mark, 1982. "Error Correction Mechanisms," The Warwick Economics Research Paper Series (TWERPS) 199, University of Warwick, Department of Economics.
    5. Gylfason, Thorvaldur, 1987. "Does exchange rate policy matter?," European Economic Review, Elsevier, vol. 31(1-2), pages 375-381.
    6. Granger, C. W. J., 1981. "Some properties of time series data and their use in econometric model specification," Journal of Econometrics, Elsevier, vol. 16(1), pages 121-130, May.
    7. Engle, Robert F. & Yoo, Byung Sam, 1987. "Forecasting and testing in co-integrated systems," Journal of Econometrics, Elsevier, vol. 35(1), pages 143-159, May.
    8. Hall, S G, 1986. "An Application of the Granger & Engle Two-Step Estimation Procedure to United Kingdom Aggregate Wage Data," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 48(3), pages 229-39, August.
    9. Williamson, John, 1982. "A survey of the literature on the optimal peg," Journal of Development Economics, Elsevier, vol. 11(1), pages 39-61, August.
    10. Branson, William H. & Katseli-Papaefstratiou, Louka T., 1980. "Income instability, terms of trade, and the choice of exchange rate regime," Journal of Development Economics, Elsevier, vol. 7(1), pages 49-69, February.
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    Cited by:
    1. Salim Chishti & M. Aynul Hasan, 1993. "What Determines the Behaviour of Real Exchange Rate in Pakistan?," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 32(4), pages 1015-1029.
    2. KHAN, Muhammad Arshad, 2008. "Long-Run And Short-Run Dynamics Of Foreign Exchange Reserves Flows And Domestic Credit In Pakistan," International Journal of Applied Econometrics and Quantitative Studies, Euro-American Association of Economic Development, vol. 5(1), pages 61-78.

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