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On the modeling of exchange rate: some evidence from Pakistan

Author

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  • Rashid, Abdul
  • Husain, Fazal

Abstract

This paper tests the interconnected form of PPP and UIP while allowing the random component of exchange rate in the specification. We find a significant long-run association among exchange rates, price and interest rate differentials. Besides the PPP and UIP conditions, the previous period exchange rate plays an important role in explaining exchange rate variability. The coefficient of error correction term reveals substantial convergence towards long-run equilibrium. These findings are interesting because they explicate the dilemma of PPP and UIP and illustrate the significance of the joint modelling of these parity conditions in explaining the convergence towards equilibrium exchange rates.

Suggested Citation

  • Rashid, Abdul & Husain, Fazal, 2012. "On the modeling of exchange rate: some evidence from Pakistan," MPRA Paper 47547, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:47547
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    File URL: https://mpra.ub.uni-muenchen.de/47547/1/MPRA_paper_47547.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    purchasing power parity; uncovered interest rate parity; random walks; exchange rate regimes;
    All these keywords.

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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