On the modeling of exchange rate: some evidence from Pakistan

Abdul Rashid () and Fazal Husain

MPRA Paper from University Library of Munich, Germany

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.

Keywords: purchasing power parity; uncovered interest rate parity; random walks; exchange rate regimes (search for similar items in EconPapers)
JEL-codes: C53 F31 (search for similar items in EconPapers)
Date: 2012-02-07
New Economics Papers: this item is included in nep-mon
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