Pakistan’s Exchange Rate Policy: An EconometricInvestigation

This paper examines empirical determinants of the Pakistanirupee exchange rate since the advent of the managed float in 1982. Thebehaviour of the nominal exchange rate results from policy interventioncarried out by the monetary authorities. Various testable hypotheses aredeveloped in order to discern the factor(s) which can be thedeterminants of the nominal rupee exchange rate. In the shon run,authorities follow a contingent policy rule with respect to movements ofthe U. S. dollar against the SDR. Based on vector autoregressiontechniques, the error correction model is employed to check theconsistency of the shon-run adjusunent process, given the authorities’longrun target rupee value. The ‘revealed’ policy is to panly offset theinflation differential between Pakistan and its major trading parUlers.Under plausible conditions, the burden of adjusunent and recessionaryconditions are likely to occur in the Pakistani expon sector.