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Don’t Fall in Love with Parity: Understanding Exchange Rate Depreciation

Author

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  • Abdul Jalil

    (Pakistan Institute of Development Economics, Islamabad)

Abstract

The Pakistani rupee has depreciated, against the US dollar, around 10 percent, since May 2021 (see Figure 1). This is a natural response of the exchange rate parity to swelling trade deficit, mounting inflation, and negative real interest rates. Considering the macroeconomic fundamentals of the Pakistani economy, it is expected that the rupee will remain under pressure and will continue on the fall. This situation raises several questions. What should be the response of the State Bank of Pakistan (SBP)? Should SBP intervene in the forex market or not save the parity? If yes, then how much? If not, then why? What should be the course of action of the government and the SBP in the long run? This policy viewpoint will answer these questions and provide straightforward guidelines for the SBP and the government.

Suggested Citation

  • Abdul Jalil, 2021. "Don’t Fall in Love with Parity: Understanding Exchange Rate Depreciation," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 60(3), pages 359-365.
    • Handle: RePEc:pid:journl:v:60:y:2021:i:3:p:359-365
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    References listed on IDEAS

    as
    1. Mark P. Taylor & Lucio Sarno, 2001. "Official Intervention in the Foreign Exchange Market: Is It Effective and, If So, How Does It Work?," Journal of Economic Literature, American Economic Association, vol. 39(3), pages 839-868, September.
    2. Bank for International Settlements, 2019. "Reserve management and FX intervention," BIS Papers, Bank for International Settlements, number 104.
    3. Nikhil Patel & Paolo Cavllino, 2019. "FX intervention: goals, strategies and tactics," BIS Papers chapters, in: Bank for International Settlements (ed.), Reserve management and FX intervention, volume 104, pages 25-44, Bank for International Settlements.
    4. Abdul Jalil, 2021. "Exchange Rate Policy Must Seek Undervaluation!," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 60(1), pages 85-91.
    5. Fayyaz Hussain & Abdul Jalil, 2007. "Effectiveness of Foreign Exchange Intervention: Evidence from Pakistan," SBP Research Bulletin, State Bank of Pakistan, Research Department, vol. 3, pages 191-208.
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