Unofficial and Official Exchange Rates Dynamics: A Case of Pakistan

Abstract

This empirical study has been undertaken to investigate dynamic relationship between nominal unofficial and official exchange rates of Pak-rupee against US$ by using ARDL and error correction models. Monthly data for the period of 1948M04 to 2001M06 has been used. Statistical results conclude that both exchange rates are cointegrated. Error correction mechanism also confirms existence of long run relationship between two nominal exchange rates. Further, estimated error correction term indicates that nominal unofficial exchange rate corrects last month's disequilibrium at the speed of 6.0972 percent. Toda and Yamamoto (1995) causality test indicates that causality does exist from nominal unofficial to official exchange rate in case of Pakistan. Restoration of nominal unofficial exchange rate to long run equilibrium implies that short-term fluctuations in official exchange rate can be forecasted in developing countries like Pakistan and central bank can align official exchange rate with unofficial exchange rate.

Exchange Rate And National Output Performances: The Implication On Nigeria’s Economy

“…LnYrt = β0 + β1LnEXCRt + β2LnEXPTt + β3LnINFt + β4LIMPt + β5LFDIt +μt 3 where, Y is output, EXCR is exchange rate EXPT is export, INF is inflation, IMP is import and FDI is foreign direct investment. Also, Chaudhry and Abdul (2014) modified Edwards (1985) by replacing unexpected money growth with broad money supply and added additional variables such as government consumption expenditure; terms of trade and net foreign aid. However, this study modified Khan-Knight (1981), Dada and Oyeranti (2012), Fapetu and Oloyede (2014) and Chaudhry and Abdul (2014) and integrated foreign reserve (FVN) in order to effectively investigate the impact of exchange rate variation on economic growth in Nigeria.…”

“…Also, Chaudhry and Abdul (2014) modified Edwards (1985) by replacing unexpected money growth with broad money supply and added additional variables such as government consumption expenditure; terms of trade and net foreign aid. However, this study modified Khan-Knight (1981), Dada and Oyeranti (2012), Fapetu and Oloyede (2014) and Chaudhry and Abdul (2014) and integrated foreign reserve (FVN) in order to effectively investigate the impact of exchange rate variation on economic growth in Nigeria. The model one is specified in its functional form as: GDP = ƒ (EXR, GE, FDI, FVN, MS) 4 The equation 4 is further specified in a log linear form as: logGDPt = α0 + α1logEXRt + α2logTGEt + α3logFDIt + α4logFVNt + α5logMSt+ et 5 a priori expectation α1,> 0, while α2, α3, α4, and α5 > 0 where, GDP is gross domestic product.…”

Efficiency of the Black Foreign Exchange Market

“…The existence of unofficial foreign exchange market can affect the macroeconomic variables such as employment by raising the domestic availability of imported inputs and can cause of an increase in the supply of foreign currency to the central bank McDermott (1989). In addition, the unofficial foreign exchange rate has a significant impact on the economy of developing country like Pakistan Chaudhry and Butt (2014).…”