url
10
Nov
2013

Performance of CHEERs Based Equilibrium Exchange Rate of Pakistan: Data Analysis

5.3 Price Level of USA

The 5 year break up description of Price level of USA for the time period of 1991M3 to 2010M5 is taken from International financial statistics, reveal that it started higher level as Pakistan’s price level but its increase is slower and more stable that’s why there is initial decrease then increase in the price differential figure 2. Because of stable policies, Price level of USA has a significant lower level of volatility suggesting that there is a lower level of inflation too, as seen in the figure 5. As Pakistan’s price level is increasing faster than the USA price level, hence the gap between the prices is widening and making the USA market more reachable as seen in figure 2. Hence an arbitrage opportunity is created where consumers can buy cheaper goods from abroad as compared to home.

5.4 Long term Interest Rate of Pakistan
In order to see the financial sector effect on the change of exchange rate, Bond rate of Pakistan is used as long run interest rates. This time series data comprises of duration from 1991M3 to 2010m5, taken from International financial statistics 2010. Looking at the graph, the financial market was constant up till the mid 1990’s where the combination of international and national events plummeted the local financial market. The higher sensitivity of the interest rates from year 2000 onwards against the economic events is due to the efforts of Shaukat Aziz and his Team in development of the banking and the financial sector.

5.5 Long term Interest Rate of USA Bond Rate is used as Long run interest rate of USA for the time period 1991M3 to 2010M5 taken from international financial statistics shows a somewhat cyclical downward trend, where it showed high degree of stability and a small amount of variability around the mean throughout.
Comparing the interest rate differential of Pakistan and USA there is an increasing trend and this gets prominent from early 2000’s. Hence with the increase in the gap, the rate of currency exchange that is required to keep the marginal value of investment constant in Pakistani Rupee faces an upward pressure, which is also confirmed by the increasing Exchange Rate.

Figure 5

Figure 5. Long run interest rate (bonds)

Figure 6

Figure 6. Interest differential

Figure 7

Figure 7. Long run interest rate

Table 3. Price level of USA

Years Mean Variance VarianceCoefficient PercentageChange
91m3 – 96m2 74.23 9.01 0.12 0.002
96m3 – 01m2 84.24 8.08 0.09 0.002
01m3 – 06m2 95.13 12.58 0.13 0.002
06 m2 – 10m5 107.99 9.23 0.08 0.001
Source: IFS 2010

Table 4. Long term interest rate (bonds) of Pakistan

Years Mean Variance VarianceCoefficient PercentageChange
91m3 – 96m2 13.01 0.49 0.03 0.01
96m3 – 01m2 8.28 18.99 2.29 -0.04
01m3 – 06m2 6.23 5.45 0.87 0.01
06 m2 – 10m5 11.09 3.83 0.34 0.01
Source: IFS 2010

Table 5. Long term interest rate (bonds) of USA

Years Mean Variance VarianceCoefficient PercentageChange
91m3 – 96m2 6.80 0.67 0.1 0.01
96m3 – 01m2 5.92 0.38 0.06 -0.004
01m3 – 06m2 4.42 0.211 0.04 0.002
06 m2 – 10m5 4.03 0.51 0.13 – 0.03
IFS 2010

5.3 Price Level of USA The 5 year break up description of Price level of USA for the time period of 1991M3 to 2010M5 is taken from International financial statistics, reveal that it started higher level as Pakistan’s price level but its increase is slower and more stable that’s why there is initial decrease then increase in the price differential figure 2. Because of stable policies, Price level of USA has a significant lower level of volatility suggesting that there is a lower level of inflation too, as seen in the figure 5. As Pakistan’s price level is increasing faster than the USA price level, hence the gap between the prices is widening and making the USA market more reachable as

About The Author

Kevin J. Brandon

Home | Site Map | Contacts

Copyright © 2013 - 2019 Investment And Finance Online. All rights reserved