Abstract
This paper examines the role of monetary fundamentals in the determination of Pak-rupee vis-à-vis US-dollar exchange rate using quarterly data over the period 1982Q2-2008Q2. Based on the Johansen (1988) and Johansen-Juselius (1990) cointegration approach there exist one significant cointegration vectors between the exchange rate and the monetary fundamentals. The long-run cointegrating coefficients are generally consistent with the predictions of Frankel’s interest rate differential variant of the monetary exchange rate model. The results of the adjustment coefficients suggest that disequilibrium is corrected by changes in exchange rate, relative money and inflation differential in the short-run. To examine the short-run dynamics in a system-wide context we have applied persistence profiles approach and the results indicates that the effect of system-wide shocks initially declines rapidly but decays slowly thereafter and completely dies out after 9 quarters. These results are consistent with non-linear adjustment and monetary factor being the main source of exchange rate volatility.
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Article Details
- Year: 2011
- Volume: 32
- Issue: 2
- Pages: 67 - 96
- Accepted: 29.07.2011
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DOI:
https://doi.org/10.5281/zenodo.21133072 -
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How to Cite?
Muhammad Arshad Khan, Abdul Qayyum (2011). Exchange Rate Determination in Pakistan: Role of Monetary Fundamentals. Journal of Economic Cooperation and Development, 32(2), 67-96. https://doi.org/10.5281/zenodo.21133072
