IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/47547.html
   My bibliography  Save this paper

On the modeling of exchange rate: some evidence from Pakistan

Author

Listed:
  • Rashid, Abdul
  • Husain, Fazal

Abstract

This paper tests the interconnected form of PPP and UIP while allowing the random component of exchange rate in the specification. We find a significant long-run association among exchange rates, price and interest rate differentials. Besides the PPP and UIP conditions, the previous period exchange rate plays an important role in explaining exchange rate variability. The coefficient of error correction term reveals substantial convergence towards long-run equilibrium. These findings are interesting because they explicate the dilemma of PPP and UIP and illustrate the significance of the joint modelling of these parity conditions in explaining the convergence towards equilibrium exchange rates.

Suggested Citation

  • Rashid, Abdul & Husain, Fazal, 2012. "On the modeling of exchange rate: some evidence from Pakistan," MPRA Paper 47547, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:47547
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/47547/1/MPRA_paper_47547.pdf
    File Function: original version
    Download Restriction: no

    References listed on IDEAS

    as
    1. Ronald Macdonald, 1995. "Long-Run Exchange Rate Modeling: A Survey of the Recent Evidence," IMF Staff Papers, Palgrave Macmillan, vol. 42(3), pages 437-489, September.
    2. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
    3. repec:osu:osuewp:014 is not listed on IDEAS
    4. Pesaran, M. Hashem & Shin, Yongcheol & Smith, Richard J., 2000. "Structural analysis of vector error correction models with exogenous I(1) variables," Journal of Econometrics, Elsevier, vol. 97(2), pages 293-343, August.
    5. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, January.
    6. Diebold, Francis X. & Rudebusch, Glenn D., 1991. "On the power of Dickey-Fuller tests against fractional alternatives," Economics Letters, Elsevier, vol. 35(2), pages 155-160, February.
    7. 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.
    8. Juselius, Katarina, 1995. "Do purchasing power parity and uncovered interest rate parity hold in the long run? An example of likelihood inference in a multivariate time-series model," Journal of Econometrics, Elsevier, vol. 69(1), pages 211-240, September.
    9. Anne-Marie Brook & David Hargreaves, 2001. "PPP-based analysis of New Zealand's equilibrium exchange rate," Reserve Bank of New Zealand Discussion Paper Series DP2001/01, Reserve Bank of New Zealand.
    10. Edison, Hali J. & Pauls, B. Dianne, 1993. "A re-assessment of the relationship between real exchange rates and real interest rates: 1974-1990," Journal of Monetary Economics, Elsevier, vol. 31(2), pages 165-187, April.
    11. Ronald MacDonald & Jun Nagayasu, 2000. "The Long-Run Relationship Between Real Exchange Rates and Real Interest Rate Differentials: A Panel Study," IMF Staff Papers, Palgrave Macmillan, vol. 47(1), pages 1-5.
    12. José R. Sánchez-Fung & Peter A. Prazmowski, 2004. "Ppp, Random Walks, And Uip After Interest Rate Liberalisation In A Small Developing Economy," Economics Bulletin, AccessEcon, vol. 6(1), pages 1-7.
    13. Mohsen Bahmani-Oskooee & Gour G. Goswami, 2005. "Black Market Exchange Rates and Purchasing Power Parity in Emerging Economies," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 41(3), pages 37-52, May.
    14. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501.
    15. Kenneth A. Froot & Michael Kim & Kenneth Rogoff, 1995. "The Law of One Price Over 700 Years," NBER Working Papers 5132, National Bureau of Economic Research, Inc.
    16. Adler, Michael & Lehmann, Bruce, 1983. " Deviations from Purchasing Power Parity in the Long Run," Journal of Finance, American Finance Association, vol. 38(5), pages 1471-1487, December.
    17. Abdul RASHID, 2009. "Testing The Modified-Combined Ppp And Uip Hypothesis In South Asian Economies," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 9(1).
    18. Taylor, Mark P. & Sarno, Lucio, 1998. "The behavior of real exchange rates during the post-Bretton Woods period," Journal of International Economics, Elsevier, vol. 46(2), pages 281-312, December.
    19. Menzie D. Chinn & Guy Meredith, 2004. "Monetary Policy and Long-Horizon Uncovered Interest Parity," IMF Staff Papers, Palgrave Macmillan, vol. 51(3), pages 409-430, November.
    20. Caporale, Guglielmo Maria & Kalyvitis, Sarantis & Pittis, Nikitas, 2001. "Testing for PPP and UIP in an FIML framework: Some evidence for Germany and Japan," Journal of Policy Modeling, Elsevier, vol. 23(6), pages 637-650, August.
    21. Lothian, James R & Taylor, Mark P, 1996. "Real Exchange Rate Behavior: The Recent Float from the Perspective of the Past Two Centuries," Journal of Political Economy, University of Chicago Press, vol. 104(3), pages 488-509, June.
    22. Robert P. Flood & Andrew K. Rose, 2002. "Uncovered Interest Parity in Crisis," IMF Staff Papers, Palgrave Macmillan, vol. 49(2), pages 1-6.
    23. Meese, Richard A & Rogoff, Kenneth, 1988. " Was It Real? The Exchange Rate-Interest Differential Relation over the Modern Floating-Rate Period," Journal of Finance, American Finance Association, vol. 43(4), pages 933-948, September.
    24. Chinn, Menzie D. & Meredith, Guy, 2000. "Testing uncovered interest parity at short and long horizons," HWWA Discussion Papers 102, Hamburg Institute of International Economics (HWWA).
    25. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-1580, November.
    26. Johansen, Søren & Juselius, Katarina, 1992. "Testing structural hypotheses in a multivariate cointegration analysis of the PPP and the UIP for UK," Journal of Econometrics, Elsevier, vol. 53(1-3), pages 211-244.
    27. Mariam Camarero & Cecilio Tamarit, 1996. "Cointegration and the PPP and the UIP hypotheses: An application to the Spanish integration in the EC," Open Economies Review, Springer, vol. 7(1), pages 61-76, January.
    28. repec:ebl:ecbull:v:6:y:2004:i:1:p:1-7 is not listed on IDEAS
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    purchasing power parity; uncovered interest rate parity; random walks; exchange rate regimes;

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • F31 - International Economics - - International Finance - - - Foreign Exchange

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:47547. 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: (Joachim Winter) or (Rebekah McClure). General contact details of provider: http://edirc.repec.org/data/vfmunde.html .

    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 CitEc recognized a reference but did not link an item in RePEc 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 RePEc Author Service 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.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.