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Nov
2013

Performance of CHEERs Based Equilibrium Exchange Rate of Pakistan: Literature Review

After introducing PPP as a tool for explaining the Exchnage Rate patterns by (Cassel, G.1918), this Parity became a common use in papers to determine Exchange Rate. Such as Keynes stated what, then, has determined and the will determine the value of Franc? First, the quantity, present and prospective, of the francs in circulation. Second, the amount of purchasing power which it suits to public to hold in that shape. Keynes (Introduction to French edition, 1924, xviii)

In correspondence to application of PPP, (Clostermann & Schnatz, 2000) implied that if this PPP holds strictly then Exchange Rate should be constant over time and the it will adjust to equate the prices between two counties in one currency terms.

Early papers like (Baillie & Selover, 1987) and (Enders, 1988) used cointegration method to explan Exchnage Rate patterns using the Price Differential between home and foriengn country (PPP) and found evidence for the presence of PPP only in the Bretton Wood period. (Baillie & Selover, 1987) carried on to find the equilibriun between Nominal Exchange Rate and Price Differenctial, the results proposed the presence of non-stationary Real Exchange Rate.

This PPP framework beagn with a basic analysis by (Frankel, 1976) who used only the varities of domestic price level indicators to find a significant relationahsip, with the price indices effecting the Exchange Rate with unit elasticity. All of these above papers considered PPP as a foundation for the Exchange Rate modelling and failed to find co-integration, so it urged to expand the model that will be more comprehensive in grasping the dynamics in the Exchange Rate.

(Clostermann & Schnatz, 2000), (Juselius & MacDonald, 2004) and (Camarero & Tamarit, 1996) expanded the model uisng Uncovered Interest Parity to incorporate the goods and capital market interaciton between the two countries. (Juselius & MacDonald, 2004) used VECM approach in order to find long run and short run relationships among the nominal Exchange Rate, PPP & UIP and applied restrictions on this CHEERS based final long run equilibrium of USA/Japan Exchange Rate to see the significance of individial Parities, the resutls proved that both Parities were working in combination.

After introducing PPP as a tool for explaining the Exchnage Rate patterns by (Cassel, G.1918), this Parity became a common use in papers to determine Exchange Rate. Such as Keynes stated what, then, has determined and the will determine the value of Franc? First, the quantity, present and prospective, of the francs in circulation. Second, the amount of purchasing power which it suits to public to hold in that shape. Keynes (Introduction to French edition, 1924, xviii) In correspondence to application of PPP, (Clostermann & Schnatz, 2000) implied that if this PPP holds strictly then Exchange Rate should be constant over time and the it will adjust to equate the prices between two counties in one currency terms. Early papers

About The Author

Kevin J. Brandon

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