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

  • 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.)

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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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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  1. 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.
  2. 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.
  3. Mizrach, Bruce, 1995. "Target zone models with stochastic realignments: an econometric evaluation," Journal of International Money and Finance, Elsevier, vol. 14(5), pages 641-657, October.
  4. Lars E. O. Svensson, 1991. "The Simplest Test of Target Zone Credibility," IMF Staff Papers, Palgrave Macmillan, vol. 38(3), pages 655-665, September.
  5. 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.
  6. 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.
  7. Krugman, Paul R, 1991. "Target Zones and Exchange Rate Dynamics," The Quarterly Journal of Economics, MIT Press, vol. 106(3), pages 669-82, August.
  8. 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.
  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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