EXCHANGE RATE DETERMINATION IN PAKISTAN: EVIDENCE BASED ON PURCHASING POWER PARITY THEORY

Muhammad Khan and Abdul Qayyum

MPRA Paper from University Library of Munich, Germany

Abstract: 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.

Keywords: Exchange Rate; Purchasing power parity; Cointegration (search for similar items in EconPapers)
JEL-codes: C32 F00 F36 (search for similar items in EconPapers)
Date: 2007-12
New Economics Papers: this item is included in nep-cwa and nep-ifn
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

Published in Pakistan Economic and Social Review 2.44(2007): pp. 181-202

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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:6754

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