Abstract:
The main focus of this paper is to measure the speed of adjustment
of the exchange rate by means of the persistent profile approach developed
by Pesaran and Shin (1996) to examine the symmetry and proportionality
assumptions of the purchasing power parity (PPP) theory of exchange rates
for the Pak-rupee vis-à-vis the US-dollar exchange rate over the period
1982Q2-2005Q4. Using cointegration and vector error-correction modeling
approaches, we find considerable support for the validity of weak-form PPP
in Pakistan. Furthermore, the symmetry and proportionality assumptions of
PPP are not verified. In the short-run, the exchange rate and foreign prices
play a significant role in the convergence process to achieve long-run
equilibrium. However, the speed of adjustment is very slow and the
persistence profiles suggest that almost 4-5 years are required to eliminate
deviations and bring the nominal exchange rate in line with the long-run
equilibrium path.
