On the modeling of exchange rate: some evidence from Pakistan

Rashid, Abdul and Husain, Fazal (2012): On the modeling of exchange rate: some evidence from Pakistan. Forthcoming in: International Review of Applied Financial Issues and Economics

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: purchasing power parity, uncovered interest rate parity, random walks, exchange rate regimes
• Subjects: C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C53 - Forecasting and Prediction Methods ; Simulation Methods; F - International Economics > F3 - International Finance > F31 - Foreign Exchange

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