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Exchange Rate Determination In Pakistan: Evidence Based On Purchasing Power Parity Theory

  • Khan, Muhammad Arshad
  • Qayyum, Abdul

This paper presents the empirical evidence on purchasing power parity (PPP) for Pak-rupee vis-à-vis US-dollar exchange rate using Johansen (1988) and Johansen and Juselius (1990) multivariate cointegration and bound testing approach to cointegration (Pesaran et al., 2001) over the period 1982Q2-2005Q4. We find a considerable support for the existence of long-run PPP. Furthermore, the results of error-correction suggest that nominal exchange rate plays an important role in eliminating deviations from long-run PPP. The results further suggest that there is high degree of foreign exchange and goods markets integration. One major policy implication derived from the findings of this study is that the monetary authorities should contain money supply growth in order to stabilize prices and reduce balance of payments deficits.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 6754.

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Date of creation: Dec 2007
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Publication status: Published in Pakistan Economic and Social Review 2.44(2007): pp. 181-202
Handle: RePEc:pra:mprapa:6754
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  2. Boyd, Derick & Smith, Ron, 1999. "Testing for Purchasing Power Parity: Econometric Issues and an Application to Developing Countries," Manchester School, University of Manchester, vol. 67(3), pages 287-303, June.
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