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8
Nov
2013

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

Performance of CHEERs Based Equilibrium Exchange Rate of Pakistan: Hypotheses, Data AnalysisPicking up from already defined general objectives, the empirical and theoretical foundation refines it to become specific hypotheses for this paper which are as follows;

H1. Is this CHEERS model reasonable to explain the exchange rate deviations in Long Run?

H2. Does PPP and UIP holds individually for the case of Pakistan while CHEERS explains the exchange rate patterns?

H3. Is the Actual Exchange Rate aligned with the proposed Equilibrium pattern suggested by the CHEERS Model?

H4. Does the CHEERS Model have sufficient forecasting power?

These above stated hypotheses will be tested one after the other in the estimation chapter in order to achieve some level of information that can help in forming policy implications for the future.

5. Data Analysis

In this section, the variables that are going to be used for the paper are checked for their empirical patterns.
5.1 Exchange Rate

Exchange Rate being primary focus of the study, describing the amount of Pakistani Rupees required to trade 1 US Dollar. This Monthly time series indicator from 1991M3 to 2010M5, taken from IFS CD 2010. The time graph represented in figure 1 shows that there is a continuous devaluation of Pakistani Rupee throughout the time except the duration of early 2000 to mid 2007, where there was inflow of Dollars in form of donations for being ally in war of terror.

5.2 Price Level of Pakistan

Price level of Pakistan is generated from Consumer Price Index (CPI) comprising of duration from 1991M3 to 2010M5, taken from International Financial Statistics. The 5 yearly breakup of the historical pattern of price level of Pakistan in table 2 showed that it has been increasing thorough out with high volatility at first and last periods, representing higher degree of Inflation confirmed from the figure 4. Highest Inflation in the last period was caused by the food shortage in the country. This pattern of the price level suggests that with this increasing price level the foreign products are becoming relatively cheaper all the time.

Figure 3

Figure 3. Change in price level of Pakistan (inflation)

Figure 4

Figure 4. Change in price level of USA (inflation)

Table 1. Exchange rate of Pakistan

Years Average Variance VarianceCoefficient Averagegrowth
91m3 – 96m2 28.35 10.76 0.37 0.19
96m3 – 01m2 46.01 45.42 0.98 0.44
01m3 – 06m2 59.43 3.03 0.05 0.02
06 m2 – 10m5 70.38 107.93 1.53 0.50
Source: IFS 2010

Table 2. Price level of Pakistan

Years Mean Variance VarianceCoefficient PercentageChange
91m3 – 96m2 45.29 49.90 1.10 0.39
96m3 – 01m2 41.10 35.62 0.50 0.34
01m3 – 06m2 88.87 59.73 0.67 0.41
06 m2 – 10m5 135.82 545.87 4.01 1.42
Source: IFS 2010

Picking up from already defined general objectives, the empirical and theoretical foundation refines it to become specific hypotheses for this paper which are as follows; H1. Is this CHEERS model reasonable to explain the exchange rate deviations in Long Run? H2. Does PPP and UIP holds individually for the case of Pakistan while CHEERS explains the exchange rate patterns? H3. Is the Actual Exchange Rate aligned with the proposed Equilibrium pattern suggested by the CHEERS Model? H4. Does the CHEERS Model have sufficient forecasting power? These above stated hypotheses will be tested one after the other in the estimation chapter in order to achieve some level of information that can help in forming policy implications for the future. 5. Data

About The Author

Kevin J. Brandon

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