Exchange Rate Volatility In Indo-Pakistani Trade: A Study With Nelson – Beveridge Decomposition
Keywords:
Stationarity, Johansen Cointegration Test, Vector Error Correction Model, Chow Test, Vector Autoregressive Estimation, Variance Decomposition, ADF Test, ARIMA,Abstract
This paper presents the results of investigation into the nature of Rupee/Pakistani Rupee exchange rate variations over the period 1976:1-2008:3 undertaken in order to examine if these exchange rates were in conformity with the ‘Purchasing Power Parity Doctrine’ at all. Both the exchange rate and relative price level were found to be I(1) variables without having any cointegration between them. Thus Purchasing Power Parity Doctrine was found to be invalidated over this historical dataset. The historical dataset is found to be comprised of the subperiod 1976:1-1993:2 and sub-period 1993:3-2008:3. There exists no evidence in favour of ‘Purchasing Power Parity Doctrine’ in the sub-period 1976:1- 1993:2. However, the estimated VEC model provide the evidence in favour of ‘Purchasing Power Parity Doctrine’ in the sub-period 1993:3- 2008:3.
