This study employs the Mundell (1963) and Fleming (1962)
traditional flow model of exchange rate to examine the long run
behaviour of rupee/US $ exchange rate for Pakistan economy over the
period 1982:Q1 to 2010:Q2. This study investigates the effect of output
levels, interest rates and prices and different shocks on exchange rate.
Hylleberg, Engle, Granger, and Yoo (HEGY) (1990) unit root test confirms
the presence of non-seasonal unit root and finds no evidence of biannual
and annual frequency unit root in the level of series. Johansen and
Juselious (1988, 1992) likelihood ratio test indicates three long-run
cointegrating vectors. Cointegrating vectors are uniquely identified by
imposing structural economic restrictions on purchasing power parity
(PPP), uncovered interest parity (UIP) and current account balance.
Finally, the short-run dynamic error correction model is estimated on
the basis of identified cointegrated vectors. The speed of adjustment
coefficient indicates that 17 percent of divergence from long-run
equilibrium exchange rate path is being corrected in each quarter. US
war with Afghanistan has significant impact on rupee in short run
because of high inflows of US aid to Pakistan after 9/11. Finally, the
parsimonious short run dynamic error correction model is able to beat
the naïve random walk model at out of sample forecasting horizons. JEL
Classification: F31, F37, F47 Keywords: Exchange Rate Determination,
Keynesian Model, Cointegration, Out of Sample Forecasting, Random Walk
Model
3.4.4 - High Performance Current Measurement with Low-Cost Shunts by means of Dynamic Error Correction
