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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

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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Bibliographic Info

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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References

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Cited by:
  1. Syed Kumail Abbas Rizvi & Bushra Naqvi & Sayyid Salman Rizavi, 2012. "What Does Pakistan Have to Join the Inflation Targeters’ Club—a Royal Flush or a Seven-Deuce Offsuit?," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 17(2), pages 35-62, July-Dec.

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