Open AccessThe Exchange Rates and Monetary Dynamics in Pakistan: An Autoregressive Distributed Lag (ARDL) Approach
Author(s) -
Muhammad Arshad Khan,
Muhammad Zabir Sajjid
Publication year - 2005
Publication title -
the lahore journal of economics
Language(s) - English
Resource type - Journals
eISSN - 1811-5446
pISSN - 1811-5438
DOI - 10.35536/lje.2005.v10.i2.a6
Subject(s) - economics , distributed lag , real interest rate , exchange rate , monetary economics , inflation (cosmology) , interest rate , short run , fisher hypothesis , macroeconomics , monetary policy , econometrics , real gross domestic product , effective exchange rate , physics , theoretical physics
In this paper we investigate both the long and short-runrelationship between real money balances, real income, inflation rate,foreign interest rate and real effective exchange rate with reference toPakistan over the period 1982Q2-2002Q4 using ARDL approach which is anewly developed econometric technique. The estimated results indicate thatin the long-run real income, inflation rate, foreign interest rate and realeffective exchange rate have a significant impact on real money balances inPakistan. The dynamics of real money demand show that the effects of rateof inflation, foreign interest rate and the real effective exchange rate aremuch smaller in the short run than long run. The results also reveal thatthe demand for real money balances in Pakistan is stable, despite theeconomic reforms pursued by the government since the late 1980s.