Open AccessDetermining The Real Exchange Rate Equilibrium for Pakistan
Author(s) -
Shazia Salam,
Mehak Ejaz
Publication year - 2021
Publication title -
jisr management and social sciences and economics
Language(s) - English
Resource type - Journals
eISSN - 2616-7476
pISSN - 1998-4162
DOI - 10.31384/jisrmsse/2021.19.1.9
Subject(s) - effective exchange rate , economics , monetary economics , real gross domestic product , exchange rate , productivity , depreciation (economics) , openness to experience , volatility (finance) , terms of trade , international economics , econometrics , macroeconomics , capital formation , psychology , social psychology , financial capital , economic growth , human capital
The achievement of macroeconomic stability and sustained economic growth are the main targets of macroeconomic agents and policymakers. High volatility in Real Effective Exchange Rate (REER) is noticed while moving towards flexible Exchange rate regime. Three assessment methodologies are followed in the paper i.e. PPP approach, PPP approach adjusted for Penn effect and reduced form equation approach to gauge REER misalignment. VAR modelling suggest that, PPP holds for Pakistan and Penn effect is witnessed in the country for FY1980-FY12018. The determinants of REER, like “openness to GDP ratio, Govt consumption to GDP ratio, Long term Investment to GDP ratio, relative productivity and terms of trade” are responsible for depreciation in REER. While, worker remittances and FDI leads towards the REER appreciation in. It is indispensable to opt for the devaluation of PKR to gain export competitiveness, which may result in shrinkage of current account deficit. To increase the productivity of tradable items and to reduce the GOVT consumption of imported items are few steps to push REER towards equilibrium level. As per the state of art model the range of misalignment in REER is from -3.9% to 4.2% in Pakistan.