IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this article

Exchange Rate and Inflation Dynamics

Listed author(s):
  • Eatzaz Ahmad

    (Department of Economics, Quaid-i-Azam University, Islamabad.)

  • Saima Ahmed Ali

    (Department of Economics, Quaid-i-Azam University, Islamabad.)

Registered author(s):

    This paper studies simultaneous determination of nominal exchange rate and domestic price level in Pakistan. The estimated model contains sufficient built-in dynamics to trace the pattern and speed of adjustment in the two variables in response to temporary or permanent shocks. The two domestic shocks considered in the paper are monetary and real shocks, while the three external shocks considered are import price, export price and foreign exchange reserves shocks. The study finds that the impact period effects of temporary shock on price level and exchange rate are divergent, while the long run effects are convergent. This means that, while purchasing power parity does not hold in the short run, there is a tendency in the system to regain relative parity in the long run. Further more continuation of shocks can produce a persistent but non-accelerating divergence between inflation rate and the rate of devaluation. Therefore the parity holds in a weaker sense, that is for the marginal fluctuations in the rates of changes in price level and exchange rate over time. It is also observed that the direction of temporary disparity between the rates of inflation and devaluation depends crucially on the origin of the shock. The shocks with direct effect on price level (exchange rate) have more pronounced effects on the rate of inflation (devaluation). Finally, the relationship between price level and exchange rate is not unidirectional, though the short run effect of devaluation on inflation is smaller than the effect of inflation on devaluation. Since movements in exchange rate are mostly driven by price inflation, the practice of using exchange rate as an independent instrument is not sustainable in the presence of inflation. From policy perspective both the inflation and exchange rate could be considered as interrelated targets while focusing on the instruments that are in effective control of policy-makers, such as money supply.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: http://www.pide.org.pk/pdf/PDR/1999/Volume3/235-251.pdf
    Download Restriction: no

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

    Volume (Year): 38 (1999)
    Issue (Month): 3 ()
    Pages: 235-251

    as
    in new window

    Handle: RePEc:pid:journl:v:38:y:1999:i:3:p:235-251
    Contact details of provider: Postal:
    P.O.Box 1091, Islamabad-44000

    Phone: (92)(51)9248051
    Fax: (92)(51)9248065
    Web page: http://www.pide.org.pk
    Email:


    More information through EDIRC

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    as
    in new window


    1. Kormendi, Roger C & Meguire, Philip G, 1984. "Cross-Regime Evidence of Macroeconomic Rationality," Journal of Political Economy, University of Chicago Press, vol. 92(5), pages 875-908, October.
    2. Faiz Bilquees, 1988. "Inflation in Pakistan: Empirical Evidence on the Monetarist and Structuralist Hypotheses," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 27(2), pages 109-129.
    3. John Cooper, 1994. "Purchasing power parity: a cointegration analysis of the Australian, New Zealand and Singaporean currencies," Applied Economics Letters, Taylor & Francis Journals, vol. 1(10), pages 167-171.
    4. Rehana Siddiqui & Usman Afridi & Zafar Mahmood, 1996. "Exchange Rate Determination in Pakistan: A Simultaneous Equation Model," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 35(4), pages 683-692.
    5. Nadeem A. Burney & Naeem Akhtar, 1992. "Government Budget Deficits and Exchange Rate Determination: Evidence from Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 31(4), pages 871-882.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:pid:journl:v:38:y:1999:i:3:p:235-251. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Khurram Iqbal)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.