IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Impact of real and nominal factors on long run equilibrium in Real Effective Exchange Rate (REER) in Pakistan

  • Waheed, Muhammad
Registered author(s):

    In this paper, we focused on the hypothesis that nominal shocks such as monetary policy have only temporary impact on long run equilibrium real exchange rate and the consequent misalignment. To do so we utilized two approaches to tackle this issue. The first approach to find out long run real exchange rate is through investigation a long run relation between real exchange rate and its theoretical determinants. The variables that have a long run relationship with the real exchange rate include the terms of trade, real interest rate differential, government spending, and tradable to nontradable ratio. We found that monetary shocks have little impact in long run. Second approach used was the structural vector autoregression by imposing long run restrictions in line with the Blanchard and Quah (1989). Again, this approach has confirmed above results that only real shocks have lasting effects on long run real exchange rate. Nominal shocks only influence the equilibrium exchange rate temporarily in short run. The consequent misalignments measured through two approaches are then compared and policy implications are drawn. Although moving in the similar direction, there magnitudes are different. One important implication for this result is that policy makers’ reliance on any one measure of to judge misalignment would be give inaccurate results.

    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://mpra.ub.uni-muenchen.de/33169/1/MPRA_paper_33169.pdf
    File Function: original version
    Download Restriction: no

    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 33169.

    as
    in new window

    Length:
    Date of creation: Dec 2009
    Date of revision: Sep 2010
    Handle: RePEc:pra:mprapa:33169
    Contact details of provider: Postal: Schackstr. 4, D-80539 Munich, Germany
    Phone: +49-(0)89-2180-2219
    Fax: +49-(0)89-2180-3900
    Web page: http://mpra.ub.uni-muenchen.de

    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. Baffes, John & Elbadawi, Ibrahim A. & O'Connell, Stephen A., 1997. "Single-equation estimation of the equilibrium real exchange rate," Policy Research Working Paper Series 1800, The World Bank.
    2. Jordi Galí & Richard Clarida, 1993. "Sources of real exchage rate fluctuations: How important are nominal shocks?," Economics Working Papers 66, Department of Economics and Business, Universitat Pompeu Fabra, revised Jan 1994.
    3. Sebastian Edwards, 1988. "Real and Monetary Determinants of Real Exchange Rate Behavior: Theory and Evidence From Developing Countries," NBER Working Papers 2721, National Bureau of Economic Research, Inc.
    4. Olivier Jean Blanchard & Danny Quah, 1988. "The Dynamic Effects of Aggregate Demand and Supply Disturbance," Working papers 497, Massachusetts Institute of Technology (MIT), Department of Economics.
    5. 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.
    6. Hinkle, Lawrence E. & Monteil, Peter J. (ed.), 1999. "Exchange Rate Misalignment: Concepts and Measurement for Developing Countries," OUP Catalogue, Oxford University Press, number 9780195211269, March.
    7. Kristian Nilsson, 2004. "Do Fundamentals Explain the Behaviour of the Swedish Real Effective Exchange Rate?," Scandinavian Journal of Economics, Wiley Blackwell, vol. 106(4), pages 603-622, December.
    8. Usman Afridi, 1995. "Determining Real Exchange Rates," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 34(3), pages 263-276.
    9. Ibrahim A. Elbadawi & Raimundo Soto, . "Real Exchange Rates and Macroeconomic Adjustment in Sub-Sahara Africa and Other Developing Countries," ILADES-Georgetown University Working Papers inv093, Ilades-Georgetown University, Universidad Alberto Hurtado/School of Economics and Bussines.
    10. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-76, December.
    11. Mark, Nelson C., 1990. "Real and nominal exchange rates in the long run: An empirical investigation," Journal of International Economics, Elsevier, vol. 28(1-2), pages 115-136, February.
    12. Elbadawi, Ibrahim A. & Soto, Raimundo, 1994. "Capital flows and long-term equilibrium real exchange rates in Chile," Policy Research Working Paper Series 1306, The World Bank.
    13. Jose De Gregorio & Holger C. Wolf, 1994. "Terms of Trade, Productivity, and the Real Exchange Rate," Working Papers 94-19, New York University, Leonard N. Stern School of Business, Department of Economics.
    14. Ronald MacDonald & Peter B. Clark, 1998. "Exchange Rates and Economic Fundamentals: A Methodological Comparison of Beers and Feers," IMF Working Papers 98/67, International Monetary Fund.
    15. Hoffmann, M. & MacDonald, R., 2001. "A real differential view of equilibrium real exchange rate," Discussion Paper Series In Economics And Econometrics 0103, Economics Division, School of Social Sciences, University of Southampton.
    16. Enders, Walter & Lee, Bong-Soo, 1997. "Accounting for real and nominal exchange rate movements in the post-Bretton Woods period," Journal of International Money and Finance, Elsevier, vol. 16(2), pages 233-254, April.
    17. Ronald MacDonald, 1997. "What Determines Real Exchange Rates? The Long and Short of it," IMF Working Papers 97/21, International Monetary Fund.
    18. Trigueros, Ignacio, 1988. "Comments on real and monetary determinants of real exchange rate behavior: Theory and evidence from developing countries by Sebastian Edwards," Journal of Development Economics, Elsevier, vol. 29(3), pages 343-345, November.
    19. Tatsuyoshi Miyakoshi, 2003. "Real exchange rate determination: Empirical observations from East-Asian countries," Empirical Economics, Springer, vol. 28(1), pages 173-180, January.
    20. 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.
    21. Lastrapes, William D, 1992. "Sources of Fluctuations in Real and Nominal Exchange Rates," The Review of Economics and Statistics, MIT Press, vol. 74(3), pages 530-39, August.
    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:pra:mprapa:33169. 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: (Ekkehart Schlicht)

    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.