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Exchange Rate Determination In Pakistan: Evidence Based On Purchasing Power Parity Theory

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Khan, Muhammad Arshad
Qayyum, Abdul

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Abstract

This paper presents the empirical evidence on purchasing power parity (PPP) for Pak-rupee vis-à-vis US-dollar exchange rate using Johansen (1988) and Johansen and Juselius (1990) multivariate cointegration and bound testing approach to cointegration (Pesaran et al., 2001) over the period 1982Q2-2005Q4. We find a considerable support for the existence of long-run PPP. Furthermore, the results of error-correction suggest that nominal exchange rate plays an important role in eliminating deviations from long-run PPP. The results further suggest that there is high degree of foreign exchange and goods markets integration. One major policy implication derived from the findings of this study is that the monetary authorities should contain money supply growth in order to stabilize prices and reduce balance of payments deficits.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 6754.

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Date of creation: Dec 2007
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Publication status: Published in Pakistan Economic and Social Review 2.44(2007): pp. 181-202
Handle: RePEc:pra:mprapa:6754

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Keywords: Exchange Rate; Purchasing power parity; Cointegration;

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Find related papers by JEL classification:
F00 - International Economics - - General - - - General
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions
F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

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    Other versions:
  15. Sean Becketti & Craig S. Hakkio & Douglas H. Joines, 1995. "Exchange rates in the long run," Research Working Paper 95-14, Federal Reserve Bank of Kansas City. [Downloadable!]
  16. Parikh, Ashok & Williams, Geoffrey, 1998. "Modelling Real Exchange Rate Behaviour: A Cross-Country Study," Applied Financial Economics, Taylor and Francis Journals, vol. 8(6), pages 577-87, December. [Downloadable!] (restricted)
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    Other versions:
  24. Hakkio, Craig S., 1984. "A re-examination of purchasing power parity : A multi-country and multi-period study," Journal of International Economics, Elsevier, vol. 17(3-4), pages 265-277, November. [Downloadable!] (restricted)
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