Article

Determinants of Exchange Rate in Global Business Review

18(4) 1–24
Pakistan: Revisited with Structural © 2017 IMI
SAGE Publications
Break Testing sagepub.in/home.nav
DOI: 10.1177/0972150917692210
http://gbr.sagepub.com

Syed Ali Raza1

Sahar Afshan1

Abstract
This study examines the determinants of exchange rate in Pakistan by using the time-series data
from 1972 to 2013. The results of the autoregressive distributed lag bound testing co-integration
approach, the Johansen and Juselius co-integration approach and the Gregory and Hansen structural
break co-integration approach confirm the significant long-run relationship between a few considered
variables. The estimations of the long run indicate a significant negative association of exchange rates
with terms of trade, trade openness and economic growth. However, money supply and inflation rate
have a positive and significant effect on exchange rates. The outcomes of the error correction model
suggest the negative and significant relationship of the terms of trade and trade openness on exchange
rates of Pakistan in the short run. However, all other variables are found insignificant in the short run.
The Granger causality test confirms the presence of a bidirectional causal relationship of the exchange
rate with economics growth and trade openness in Pakistan. However, the inflation, money supply
and terms of trade possess the unidirectional causality which runs from the explanatory variable to
the exchange rate of the country. The present study may guide policymakers in formulating conclusive
monetary and fiscal policies to ascertain the less volatile and productive exchange rate for Pakistan to
attain sustainable economic growth for a long span of time.

Keywords
Exchange rate, economic growth, terms of trade, inflation, time series

Introduction
The importance of exchange rate has been conversed massively in the literature due to its dominant role
in economic prosperity and desirable acceptance from the outer world (Aghevli, Khan, & Montiel, 1991;
Algieri, 2011; Eichengreen, 2008; Lane & Ferretti, 2002). Exchange rate of any country indicates its
competitiveness in international economy and strengthens the inward stability of a country (Gala &

1
IQRA University, North Campus, North Karachi, Karachi, Pakistan.

Corresponding author:
Syed Ali Raza, IQRA University, North Campus, Plot No. 204–205, Sector 7B/1, North Karachi, Karachi 75850, Pakistan.
E-mail: syed_aliraza@hotmail.com
2 Global Business Review 18(4)

Lucinda, 2006). The under and overestimation of home currency is mainly represented by the movement
of exchange rates. It exhibits the value of the domestic currency in comparison of foreign currencies
(Khattak, Tariq, & Khan, 2012).
Exchange rates are found to have enormous instability from the culmination of Bretton-Woods
regime. Several researchers discussed exchange rates due to its global significance and influence on the
economic stability, productiveness, trade patterns and investments (Ahmed, 2009; Algieri, 2011; Frankel
& Rose, 1996; Meese & Rogoff, 1983; Mirchandani, 2013). Studies have been conducted to forecast the
results of steady and unsteady exchange rates. Stability in exchange rates resulted in improved foreign
investments, boost of exports and favourable change in balance of trade of the country (Berka &
Devereux, 2010; Drine & Rault, 2006; Edwards, 1988; Khattak et al., 2012; Jawaid & Raza, 2013a).
Unsteadiness in the trend of exchange rates enlarges the country’s trade deficit, increases inflation and
cuts down the investment level (Eichengreen, 2008; Xiaopu, 2002).
What determines exchange rate is an unsettled matter in the literature. Balassa (1964) propose that
the growth of an economy is supplemented with the appreciation of its home currency. Better economic
growth and domestic production exhibit prosperity of a country. Rise of production indicates that the
country is receiving their anticipated revenues. This improvement in revenues generates demand for
the local currency and brings an appreciation in it (Bleaney, 1996).
In the process of exchange rate determination, the literature found trade openness to be connected
with countries growth and exchange rates. The openness of trade reflects the degree of trade horizons
between the countries and economies. Openness of trade has shown both negative and positive impacts
on exchange rate of a country (Drine & Rault, 2006; Hau, 2002; Lartey, Mandelman, & Acosta, 2008;
Xiaopu, 2002). The negative relationship of trade openness generally explains the lesser contribution of
exports as compared to imports (Hsieh, 1982). Rising values of imports increase the demand of foreign
currencies and devalue the home currency (MacDonald & Ricci, 2005).
Conversely, if the contribution of export is greater in a country’s trade openness, this will be reflected
in the appreciation of the local currency. Likewise, the terms of trade can also contribute in the appreciation
and depreciation of the home currency and also have an impact on the economic performance of a country
(De Gregorio & Wolf, 1994; Diaz, 1982; Frenkel & Razin, 1992; Jawaid & Raza 2013b, 2015; Kumar,
2010; Roldos, 1990). Algieri (2011) suggested that for small open economy, enhancement in export
prices augments terms of trade and boosts export revenues. This leads to a surge in spending on all goods,
which raises domestic prices relative to foreign prices, resulting in the appreciation of exchange rate. For
a large open economy, a rise in export prices will provoke a slump in revenues, if its demand for exports
is elastic and cause devaluation of exchange rates but in the case of inelastic export demand, rise in export
prices increases revenues and causes valuation in real exchange rates of the country.
Purchasing power parity regulates exchange rate through inflation. The theory states that in countries
following fluctuating exchange rates, equilibrium will occur when these countries hold similar buying
power. This concludes that if any one of the countries has a greater price level, the home currency of that
country will be facing depreciation in exchange rates (Engel & Rogers, 2001). Higher inflation rates
minimize the competitiveness of the country in international market. It reduces country’s export and
decrease the demand of local currency (Smith, 1999). This ultimately results in a lower value of the
home currency (Kulkarni & Ishizaki, 2002).
Another interesting determinant of exchange rate is the interest rate as indicated by interest rate
parity approach (Dornbusch, 1983; Effiong, 2014; Frenkel & Razin, 1992). According to this approach,
the country’s increasing interest rate experiences rise in the value of their domestic currency as compared
to country’s regulating lower rates and faces devaluation (Clostermann & Schnatz, 2000). Greater
return resulting from higher rates appeals investors and increases capital invasions. This resulted in
Raza and Afshan 3

improved demand for the home currency and upraises its value (Bailliu, Lafrance, & Perrault, 2005;
Neumeyer & Perri, 2005).
The enlarged supply of money cuts down the interest rate by making money easily available and
cheaper to acquire. This brings depreciation of domestic currency (Saeed, Awan, Sial, & Sher, 2012).
Abundant money supply reflects the accessibility of funds in the market to purchase goods and services.
In order to meet this excess demand, manufacturers will employ more workers. This will raise the cost
of output and subsequently resulted in higher prices to meet the extra cost of manufacturing (Bleaney &
Fielding, 2002). Higher price level ends up in devaluation of home currency (Abbas, Khan, & Rizvi,
2011; Khattak et al., 2012; Wilson, 2009).
Over the decades, Pak rupee (PKR) stumbled against dollar. Although the government made many
alterations to the historical practices including excessive export incentives and change in the exchange
rate regimes, they are unable to reverse the increasing trend in the exchange rate of US dollar (USD) in
terms of PKR. Before 1982, Pakistan was having fixed exchange rate regime and USD/PKR rate was
fixed at ` 9.90 during the period 1973–1981. In 1982, State Bank of Pakistan adopted floating exchange
rate regime with the expectation of appreciation in the home currency. Contrary to the expectations, the
change resulted in further depreciation in the value of PKR by ` 2.94. After that, there was no stopping
in the depreciation of PKR against USD (Khattak et al., 2012).

Motivation of the Study

The literature has voluminous studies on the determinants of exchange rate due to its vital role in
country’s prosperity but most of the existing studies utilize cross-country data (Amor et al., 2008; Cady
& Garcia, 2007; Edwards, 1987; Joyce & Kamas, 2003; Odedokun, 1997).2 Panel data are helpful in
getting answers in a broader way but it lacks specification. In order to provide constructive insights and
guidance to the local policymakers, time-series data assist in getting more specific and in-depth analysis
of every individual country. The present research contributed to the literature in five distinctive ways by
analyzing the dynamics and key determinants of exchange rate in Pakistan.
First, this study is an innovative attempt to investigate exchange rate determination of Pakistan. From
the beginning of floating exchange rate regime, Pakistan is facing depreciation in its home currency. This
indicated the presence of inconsistent policies and lack of sufficient understanding. The multidirectional
efforts made by the government and policymakers lack specification. They failed to bring appreciation
and stability in the value of PKR against USD. Therefore, it is crucial to explore in depth, the reasons of
such impulsiveness of exchange rate in Pakistan.
Second, the current study makes use of long time-series data. The data comprise of 42 observations,
that is, from the period of 1973 to 2013. The long sample period utilized in the study is after the separation
of Bangladesh from Pakistan and entails the entire set of USD to PKR exchange rate data that will be
helpful in better investigating the dynamics of exchange rate in Pakistan. Third, this study utilizes the
pioneering statistical contribution of autoregressive distributed lag (ARDL) co-integration framework to
analyze the long-run relationship among the considered variables. The methodology of ARDL
co-integration has several underlying benefits. This approach makes its application possible regardless
the considered variables are purely I(0), I(1) or mutually co-integrated (Pesaran & Shin, 1999). The
approach has also processed better properties of small sample (Haug, 2002). Furthermore, ARDL
co-integration makes sure the estimation even if the study has endogenous independent variables
(Pesaran & Shin, 1999; Pesaran, Shin, & Smith, 2001). These benefits ensure that the empirical findings
from ARDL co-integration method are reliable and more accurate than prior studies.
4 Global Business Review 18(4)

Fourth, in the literature, some conflicting evidence is available against the first-generation (without
structural breaks) unit root tests and co-integration techniques. Researchers argue that these unit root
tests and co-integration techniques provide misleading results due to their low size and power. These
tests also failed to provide any information about the structural breaks stemming in the series and may
provide doubtful results of long-run relationship among the considered variables. Therefore, to ascertain
the findings of results, we also use Zivot and Andrews (1992) structural break unit root test and Gregory
and Hansen (1996) structural break co-integration approach to identify the structural breaks in the series.
Fifth, this study is not constrained by any single econometric approach to estimate long-run coefficients
as present in some past studies (Mirchandani, 2013; Razi, Shafiq, Ali, & Khan, 2012). In this research,
to confirm the robustness of results, initial result is undergone through two sensitivity analyses. First, by
undertaking the dynamic ordinary least square (DOLS) estimation and second using the fully modified
ordinary least square (FMOLS) estimation method.
This article is arranged in nine sections. The second section sets light on the empirical literature of
exchange rates determination. The third section comprises of the modelling framework; the fourth sec-
tion displays estimations and results, the fifth section signifies the robustness of results through sensitivity
analysis of DOLS and FMOLS, the sixth and seventh sections evaluate the long-run and short-run
stability of coefficients using rolling window and CUSUM–CUSUM (Cumulative Sum) of square
framework. The eighth section presents the results of Granger causality and finally the ninth section
discusses conclusion and policy implications.

Literature Reviews
Several researchers and economists determine exchange rates with diverse approaches and theories.
None of the model provided the exact parameter to foresee the dynamics of exchange rates in all
environments; yet, altogether they are useful in helping and reducing its unpredictability by identifying
the key determinants of exchange rates in diverse scenarios. Plenty of the literature focuses on the link
of country’s trade to the exchange rates. Siddiqui, Afridi and Mehmood (1996) analyze the exchange rate
behaviour in Pakistan by using the two-stage least square procedure during the period 1960–1994. The
study concludes that openness of trade assists in the appreciation of exchange rate. However, the results
evidence that terms of trade was insignificant to affect real exchange rate.
Elbadawi and Soto (1997) discuss the impact of macroeconomic determinants on real exchange rate
of seven emerging countries3 by using the data of 35 years from 1960 to 1994. The results of error
correction model and co-integration technique reveal that larger degree of trade openness is assured by
depreciated real exchange rates. The study also concludes that rising interest rates bring devaluation to
it. Terms of trade also proves to be a significant determinant of exchange rates exhibiting both positive
and negative relationships in studied countries.
Combining the linkage of terms of trade and degree of trade openness to the exchange rate, Ahmed
(2009) studies the capital flows and real exchange rate overvaluation in Pakistan using time-series data
from 1973 to 2007. The results from vector error correction model (VECM) evidence that terms of trade
and trade openness are significant to influence equilibrium exchange rates and elaborate that unit increase
in trade openness drops down the equilibrium exchange rate by 1.0 per cent. Kumar (2010) also
investigates the determinants of exchange rate in India using ARDL approach. Quarterly data have been
used from 1997 Q2 to 2009 Q2. Results indicate that terms of trade exhibits the negative significant
relationship with exchange rate. The results also show that trade openness has a positive significant role
in predicting Indian exchange rate in long run.
Raza and Afshan 5

Focusing on terms of trade, Bergval (2004) investigates the contributing factor of real exchange rate
in four Nordic countries.4 This study conducts Johansen’s co-integration technique and considers quarterly
data from 1975 to 2001. Results confirm that terms of trade is significant and crucial to influence the
long-term movement in exchange rate of all Nordic countries except for Finland. Similarly, Bahmani-
Oskooee & Tanku (2006) also dissects the determinants of exchange rate of 38 African countries during
the period 1970–1990. The results from panel regression highlight that improvement in terms of trade
arising from the declining import prices improved the home currency although if the improvement is
produced from the increased export prices, this brought depreciation in the exchange rates.
Emphasizing productivity and terms of trade to determine exchange rate, Joyce and Kamas (2003)
studied the factors of real exchange rate in three Latin American countries5 by using data during the
period 1971–1995. Results from Johansen’s co-integration witness the presence of a long-run relationship
of exchange rate with terms of trade and productivity in Colombia, Argentina and Mexico. Conversely,
when Milesi-Ferretti and Lane (2010) scrutinize the determinants of the Irish real exchange rate during
the period 1970–1997, they find no evidence on the connection of terms of trade and exchange rate.
Results from Johansen co-integration technique conclude a strong positive association between relative
output and real exchange rates. However, the study is unable to find the substantial impact of terms of
trade on the Irish exchange rates.
In India, Mallick (2010) studied the features that determine the movement of exchange rate in the
presence of capital mobility regime considering the monthly observations from 1994 to 2007. Results
from FMOLS suggest that real output growth exerts a significant impact on the appreciation of Indian
rupee. Algieri (2011) explores the determinants of Russian foreign exchange rate by using VECM and
Johansen co-integration during the period 1993–2010. Results indicate that trade openness has a negative
long run association with exchange rate. The study suggests that more open economy tends to depreciate
the Russian exchange rate.
Hau (2002) recognizes that movements of exchange rate decrease in more open economies by using
data of 48 countries. Results show that trade openness is inversely related with real exchange rate. By
consuming a model where economies were separated in tradable and non-tradable sectors, the findings
display that more open economies were more flexible to the price levels which assist in declining
unsuspected money supply and ultimately results in lower instability of exchange rate. However, the
results were found truer for tradable goods sectors relative to non-tradable goods.
Emphasizing money supply as a determinant of exchange rate, Wilson (2009) analyzes the effective
exchange rate of dollar with trading partners by using quarterly data from 1973 to 2008. Results from
Johansen co-integration test indicate that money supply possesses a positive relationship with effective
exchange rate and rise in money supply creates devaluation in the USD. Likewise, Saeed et al. (2012)
analyze the determinants of exchange rate in Pakistan. Monthly data were collected from the period of
January 1982 to April 2010. This study conducts empirical investigation by applying ARDL and error
correction model. Results evidence that money supply is significant and affect positively to exchange
rate in the long run; however, there is no short-run effects of money supply on exchange rates in Pakistan.
In South Africa, De Bruyn, Gupta and Stander (2013) investigate the role of the monetary model in
exchange rate determination. The study utilizes a long set of data comprising 101 years, that is, from
1910 to 2010. Results from co-integration conclude the significant long-run association of money supply
and real gross domestic product (GDP) with exchange rate of the country. Liew, Baharumshah and Puah
(2009) also explore the relationship between exchange rates and its determinants considering monthly
data from the period of January 1977 to March 2006. Results of Johansen co-integration technique
indicate that interest rate and GDP are inversely associated with exchange rate in Thailand.
6 Global Business Review 18(4)

Khan and Qayyum (2011) investigate the determinants of exchange rate in Pakistan by considering
quarterly observations from 1982 to 2008 and deploying Johansen and Juselius co-integration (J.J.
co-integration) technique. The results specify that money supply and inflation differential are positive
significant determinants of exchange rate in Pakistan and the rise in the variables tends to depreciate the
PKR, whereas interest rate is found to be negatively co-integrated with exchange rates. In Pakistan,
Khattak et al. (2012) also explored the factors affecting the nominal exchange rates using time-series
data from the period of 1982 to 2008. Results show that money supply and inflation are positively
significant, while real GDP and interest rates possess a negative significant relationship with exchange
rates in Pakistan. The results from Granger causality also indicate a bidirectional association of real GDP
and inflation with exchange rates. However, interest rates and money supply show a unidirectional
relationship with exchange rates in Pakistan.
Performing the cross-country analysis, Gente and Ledesma (2006) scrutinize the dynamics of
exchange rates in Korea, Singapore, Thailand and Malaysia from the period of 1980 to 2001. Results of
Johansen co-integration technique conclude that rise in World’s interest rates tends to depreciate the
equilibrium exchange rates of a borrower country and appreciate in a lender country. Agbola and
Kunanopparat (2005) assess the determinants of exchange rate in Thailand from 1990 to 2002. Results
from Johansen’s maximum likelihood (ML) Multivariate co-integration show that long-run association
of exchange rate exists with per capita GDP and inflation differential.
Parveen, Khan and Ismail (2012) also explore the dynamics of exchange rate in Pakistan from 1975
to 2010. The results from regression technique show that inflation is the most important determinant for
predicting exchange rate in Pakistan exhibiting negative relationship with PKR valuation. It is also found
that economic growth measured by GDP growth rate is significant to cause variation in Pakistan’s
exchange rates. This study recommends the harmonization of monetary and fiscal policies to get the
effective link to influence and promote Pakistan’s trade.
Mirchandani (2013) studied the dynamics of exchange rate movement and concluded that interest
rates and inflation are negatively correlated with exchange rate. The study also links GDP with exchange
rates and finds a significant positive association of country’s economic growth with exchange rate. In
Malaysia, Wong (2013) examines the link between exchange rate misalignments and economic growth
from the period of 1971 to 2008. Result of ARDL approach indicates that devaluation of exchange rate
augments growth of the country. The study also concludes that higher interest rates result in appreciation
of home currency.
These findings have highlighted individual macroeconomic elements which could influence the
dynamics of exchange rates. Hence, this study outspreads the analysis to the case of Pakistan and serves
as a guide for estimation stage to facilitate the required theoretical foundation that would be beneficial
for predicting exchange rates in Pakistani scenario.

Empirical Framework
After reviewing the theoretical and empirical work, the model to examine the determinants of exchange
rate is derived by using the purchasing power parity approach and interest rate parity approach. Purchasing
power parity regulates exchange rate through inflation. The theory states that in countries following
fluctuating exchange rates, equilibrium will occur when these countries hold similar buying power. This
concludes that if any one of the countries has a greater price level, the home currency of that country will
be facing a depreciation in exchange rates (Engel & Rogers, 2001). According to the interest rate parity
approach, the country’s increasing interest rate experiences rise in the value of their domestic currency
Raza and Afshan 7

as compared to country’s regulating lower rates and faces devaluation (Clostermann & Schnatz, 2000).
Greater return resulting from higher rates appeals investors and increases capital invasions. This resulted
in improved demand for the home currency and upraises its value (Bailliu et al., 2005; Neumeyer &
Perri, 2005). The final model is derived by using the following framework:

ER t = b 0 + b 1 GDPt + b 2 INFt + b 3 INTt + b 3 MS t + b 3 TOTt + b 3 TOPt + f t

where εt is the error term, ER is the currency exchange rate of Pakistan against the US currency, GDP is
real gross domestic product as a proxy of economic growth, INF is inflation which is computed by using
the consumer price index, INT is average annual interest rate, MS is the total money supply in the
economy, TOT is terms of trade which represents the ratio of an index of a country’s export prices to an
index of its import prices and TOP is trade openness which is measured by import plus export divide by
GDP. All variables are used in the log linear form. Annual time-series data are used during the period of
1972–2013. All data are gathered from different issues of economic surveys of Pakistan.

Unit Root Analyses

The augmented Dickey–Fuller (ADF) and Phillips–Perron (PP) unit root tests are used to examine the
stationary properties for a long-run relationship of time-series variables. The ADF (see Dickey & Fuller,
1979) test is based on the following equation:
k
DYt = a 0 + a 1 Yt - 1 + | d j DYt - j + f t
j=1

where εt is pure white noise error term, D is the first difference operator, Yt is a time series, a0 is a
constant and k is the optimum number of lags of the dependent variable. The ADF test determines
whether the estimates of coefficients are equal to zero. The ADF test provides cumulative distribution of
ADF statistics. The variable is said to be stationary if the value of the coefficient a1 is less than the
critical values from fuller table. The PP (see Phillips & Perron, 1988) unit root test equation is given as
follows:
DYt = a + t * Yt - 1 + f t

The PP unit root test is also based on t-statistics that is associated with estimated coefficients of t*.
In the literature, some conflicting evidence is available against the ADF and PP unit root tests. Researchers
argue that these unit root tests provide misleading results due to their low size and power. These tests also
failed to provide any information about the structural breaks stemming in the series. Therefore, to
ascertain the results of unit root properties, we also use Zivot and Andrews (1992) structural break unit
root test to identify the structural breaks in the series.

Co-integration Analyses
The ARDL method of co-integration developed by Pesaran and Pesaran (1997), Pesaran and Shin (1999)
and Pesaran et al. (2000, 2001) is used with the help of unrestricted VECM to investigate the long-run
relationship between workers’ remittances and imports. The ARDL approach has several advantages
upon other co-integration methods. The ARDL approach may be applied irrespective of whether
8 Global Business Review 18(4)

underlying variables are purely I(0), I(1) or mutually co-integrated (Pesaran & Shin, 1999). The ARDL
approach has estimated better small sample properties (Haug, 2002). In the ARDL procedure, the
estimations of results are even possible if the explanatory variables are endogenous (Pesaran & Shin,
1999; Pesaran et al., 2001). The ARDL model is developed for estimations as follows:
p p p
DER t = } 0 + } 1 | DER t - 1 + } 2 | DGDPt - 1 + } 3 | DINFt - 1 +
i=1 i=1 i=1
p p p
} 4 | DINTt - 1 + } 5 | DMS t - 1 + } 6 | DTOTt - 1 +
i=1 i=1 i=1
p
} 7 | DTOPt - 1 + c 1 ER t - 1 + c 2 GDPt - 1 + c 3 INFt - 1 +
i=1
c 4 INTt - 1 + c 5 MS t - 1 + c 6 TOTt - 1 + c 7 TOPt - 1 + n t
where W0 is a constant and nt is the white noise error term; the error correction dynamics are denoted by
the summation sign, while the second part of the equation corresponds to long-run relationship. Schwarz
Bayesian criterion (SBC) is used to identify the optimum lag of the model. In the ARDL model, we first
estimate the F-statistics value by using the appropriate ARDL models. Second, the Wald (F-statistics)
test is used to investigate the long-run relationship between the series. The null hypothesis of no
co-integration is rejected if the calculated F-test statistics exceeds the upper critical bound (UCB) value.
The results are said to be inconclusive if the F-test statistics falls between the upper and lower critical
bound. Finally, the null hypothesis of no co-integration is accepted if the F-statistics is below the lower
critical bound. If the long-run relationship between the determinants of exchange rate is found, then we
estimate the long-run coefficients. The following model will be used to estimate the long-run coefficients:
p p p
ER t = g 0 + g 1 | ER t - 1 + g 2 | GDPt - 1 + g 3 | INFt - 1 +
i=1 i=1 i=1
p p p
g 4 | INTt - 1 + g 5 | MS t - 1 + g 6 | TOTt - 1 +
i=1 i=1 i=1
p
g 7 | TOPt - 1 + n t
i=1

If we find evidence of long-run relationship between the determinants of exchange rate in Pakistan,
then we estimate the short-run coefficients by employing the following model:
p p p
DER t = { 0 + { 1 | DER t - 1 + { 2 | DGDPt - 1 + { 3 | DINFt - 1 +
i=1 i=1 i=1
p p p
{ 4 | DINTt - 1 + { 4 | DMS t - 1 + { 4 | DTOTt - 1 +
i=1 i=1 i=1
p
{ 4 | DTOPt - 1 + nECM t - 1 + n t
i=1

The error correction model shows the speed of adjustment needed to restore the long-run equilibrium
following a short-run shock. n is the coefficient of error correction term in the model that indicates the
speed of adjustment.
Raza and Afshan 9

J.J. co-integration (Johansen & Juselius 1990) technique is also used to analyze the existence of long-
run relationship between the determinants of exchange rate in Pakistan. The J.J. co-integration test is
based on mtrace and mmax statistics. First ‘trace test’ co-integration rank r is as follows:

n
m trace = - T | In (1 - m j)
j = r+1

Second, mmax, that is, the maximum number of co-integrating vectors against being + 1 is presented in
the following way:

m max (r, r + 1) = - TIn (1 - m j)

The null hypothesis of the J.J. co-integration is that there is no long-run co-integration among the
variables. If the null hypothesis is rejected, it means there is a significant long-run relationship among
the series of variables and vice versa.
In the literature, some conflicting evidence is available against the J.J. and ARDL co-integration
methods. Researchers argue that these co-integration approaches failed to provide any information about
the structural breaks stemming in the series and may provide doubtful results of long-run relationship
among the considered variables. Therefore, to ascertain the results of long-run relationship, we also use
Gregory and Hansen (1996) structural break co-integration approach to identify the structural breaks in
the series.

Long-run Stability and Elasticity

In this study, we use four different estimation approaches to analyze the long-run coefficients and
stability of model to ascertain the robustness of the long-run relationship between the determinants of
exchange rate in Pakistan. First by using the ARDL-based coefficient method, second by using FMOLS
method, third by using DOLS method and fourth by using rolling window analysis procedure.

Causal Relationship
We have applied Granger causality estimation procedure to analyze the causal relationship between the
determinants of exchange rate in Pakistan to ascertain the direction of the causal relationship among the
considered variables. This ensures that our conclusions regarding the causal relationship of considered
variables are accurate and more reliable as compared to past studies.

Estimations and Results

To check the stationary properties, we use ADF and PP unit root tests. Table 1 represents the results of
stationary tests. First, these tests are applied on level of variables than on their first difference.
The results of Table 1 show that all variables are stationary and integrated at first difference in both
tests of unit root. This implies that there is no issue of unit root, and the series of variables may be used for
further long-run estimations. In past studies, some researchers argue that ADF and PP unit root tests
10 Global Business Review 18(4)

Table 1.  Stationary Test Results

ADF Test PP Test

I(0) I(1) I(0) I(1)
Variables C C&T C C&T C C&T C C&T
ER 2.11 –1.29 –4.81 –5.52 2.05 –1.25 –4.80 –5.53
GDP –1.80 –2.42 –5.14 –5.17 –1.93 –2.12 –4.72 –4.94
INF –2.32 –2.15 –4.11 –4.07 –2.12 –2.05 –3.33 –3.36
INT –2.16 –2.12 –3.90 –3.82 –1.97 –1.96 –3.94 –3.86
MS 1.26 1.84 4.63 4.99 –1.36 1.75 –3.79 –6.50
TOT –1.01 –3.16 –6.43 –5.54 –1.00 –3.01 –6.43 –6.36
TOP –2.13 –2.43 –4.31 –4.48 –2.01 –2.35 –6.32 –6.45
Source: Authors’ estimation.
Note:  The critical values for ADF and PP tests with constant (c) and with constant & trend (C&T) 1%, 5% and 10% level of
significance are –3.711, –2.981, –2.629 and –4.394, –3.612, –3.243, respectively.

Table 2.  Zivot–Andrews Structural Break Trended Unit Root Test

At Level At First Difference

Variables t–statistics Time Break t–statistics Time Break
ER –2.058 (1) 1983 –4.258 (1)** 2008
GDP –1.985 (1) 2005 –5.896 (1)* 1993
INF –1.359 (1) 2010 –6.789 (1)* 2010
INT –2.895 (1) 2004 –4.920 (1)** 2004
MS –2.005 (1) 2009 –7.258 (1)* 2010
TOT –2.758 (1) 1993 –5.801 (1)* 1997
TOP –1.980 (1) 2002 –4.278 (1)** 1997
Source: Authors’ estimation.
Notes: Lag order shown in parenthesis. * represents significance at 1% level. ** represents significance at 5% level.

provide misleading results due to their low size and power. These tests also failed to provide any information
about the structural breaks stemming in the series. Therefore, to ascertain the results of unit root properties
we also use Zivot and Andrews (1992) structural break unit root test to identify the structural breaks in the
series. Table 2 represents the results of Zivot and Andrews structural break unit root test.
The results of Table 2 show that all variables are non-stationary at level with intercept and trend but
variables are found to be stationary at the first difference. This confirms that series of all variables are
co-integrated at I(1). Results of all three unit root tests confirm the robustness of results that all variables
are co-integrated at I(1) and we can use these series for further long-run estimation procedures.
The ARDL method for co-integration is used to estimate the long-run relationship of considered
independent variables with exchange rate in Pakistan. The first step is to determine the optimal lag length
of the variables. The order of optimal lag length is decided by using the SBC. Table 3 shows the results
of the ARDL co-integration method.
The ARDL results suggest the rejection of null hypothesis of no co-integration in the model because
the value of the F- statistics is greater than the upper bound critical value at 1 per cent level of significance
in favour of alternative hypothesis that the valid long-run relationship exists among the considered
variables in Pakistan.
Raza and Afshan 11

The J.J. co-integration method is also used to estimate the long-run relationship. The J.J. co-integration
method is preferred over the Engle–Granger co-integration method. One of the shortcomings of
literature’s well-used Engle–Granger single equation-based co-integration is seen in the cases when
there are more than two research variables in the study. The provision for multivariate framework in
J.J. co-integration allows us to work out more than one co-integrating vectors in the model. Table 4 repre-
sents the calculated and critical values of trace statistics and maximum eigenvalue statistics of J.J.
co-integration method. Results indicate the rejection of null hypothesis of no co-integration in the model
at significance level of 5 per cent in favour of alternative hypothesis that is the existence of one or more
co-integrating vectors. The findings confirm the existence of long-run relationship between exchange
rate and the predictors of the study.
In past studies, some researchers argue that ARDL and J.J. co-integration methods provide doubtful
and misleading results due to the presence of structural break in a series. Therefore, to ascertain the
results of long-run relationship, we also use Gregory and Hansen (1996) structural break co-integration
approach. Table 5 represents the results of Gregory and Hansen co-integration approach. Results again

Table 3.  Lag Length Selection and Bound Testing for Co–integration

Lags Order AIC HQ SBC F–test Statistics

0 –0.510 –0.407 –0.180
1 –9.351 –7.980 –4.580 17.795*
2 –9.531* –8.524* –6.718*
Source: Authors’ estimation.
Note: * 1% level of significance.

Table 4.  Co-integration Test Results of Exchange Rate Model

Null Hypothesis Trace 5% Critical Max. Eigenvalue 5% Critical

No. of CS(s) Statistics Values Statistics Values
None 132.694 83.937 52.260 36.630
At most 1 80.435 60.061 35.171 30.440
At most 2 45.264 40.175 29.452 24.159
At most 3 15.812 24.276 10.316 17.797
Source: Authors’ estimation.

Table 5.  Gregory–Hansen Structural Break

Co-integration Test

ADF Procedure
Structural Break 1997
t-statistics –7.258
p-value 0.000
Phillips Procedure
Structural Break 1997
t-statistics –6.327
p-value 0.000
Source: Authors’ estimation.
12 Global Business Review 18(4)

confirm the valid long-run relationship among variables. Results of all three co-integration tests confirm
the robustness of results that valid long-run relationship exists among considered variables. After having
the valid evidence of long-run relationship between exchange rate and predictors of this study, we now
estimate the long-run and short-run coefficients.
Table 6 shows the results of long-run estimations. Results of Table 5 show the negative impact of
GDP on the exchange rate of Pakistan. The results are consistent with the findings of Mirchandani (2013)
and are logical since increase in domestic production reflects that the manufacturers are getting their
anticipated revenues which will generate the demand for the domestic currency and appraises it against
the foreign currency (Bleaney, 1996). Likewise, long-run coefficients of terms of trade and trade openness
are also statistically significant to determine exchange rates with the expected negative sign in Pakistani
scenario. The trend of Pakistan’s trade is highly influenced by rising import values. This results in
prominent contribution of imports in country’s trade openness and low ratios of terms of trade where
exports are inadequate to finance imports. Exports of Pakistan are mostly comprised of primary
commodities, whereas imports encompass necessary commodities such as oil and petroleum goods. In
the last 10 years, petroleum products constitute 25 per cent of the total imports in Pakistan. The consistent
rise in oil prices worsen the situation and resulted in increased demand of dollar and appreciation in
exchange rates. The results are also consistent with Algieri (2011) and Ahmed (2009).
On the other hand, money supply and inflation have significant positive relationship with exchange
rates in the long run. There exists a continuous increasing trend of money supply in Pakistan. Excess
supply of money cuts down the interest rate by making money easy and cheaper to acquire. This creates
devaluation of home currency. Also ample supply of money causes the availability of funds in the market
to buy goods and services. To meet this additional demand, manufacturers employ more workers and end
up with increased cost of production. The scenario pushes the prices to go up, decreases the global
competitiveness of Pakistan and results in devaluation of home currency (Bleaney & Fielding, 2002).
Historically viewed, Pakistan’s experience in inflation rate over the last 25 years can be expressed in
three distinctive phases. Inflation was at double digit in the first 7 years during 1990s. In the next 10
years from 1997 to 2007, inflation was contained to single digit in the range of 3–9 per cent. However,
it remained very volatile during 2008–2012 and remained almost at double digit with varying magni-
tudes. The weight of foods and cereal items in the consumer price index of Pakistan remained around
40–55 per cent. The major portion of inflation is also coming from the foods and cereal items. Much of
the reason for high CPI has to do with poor monsoon planning and inefficient structure of supply chain
management in Pakistan. These findings are also consistent with Wilson (2009), Khan and Qayyum

Table 6.  Long–term Determinants of Exchange Rate

Variables Coefficient t–stats Prob.

C 0.551 1.078 0.289
GDP –0.094 –2.375 0.023
INF 0.123 4.471 0.000
INT –0.019 –0.771 0.446
MS 0.410 15.857 0.000
TOT –0.278 –1.829 0.076
TOP –0.442 –6.335 0.000
Adj. R2 0.987
DW stats 1.501
F–stats (Prob.) 220.015 (0.000)
Source: Authors’ estimation.
Raza and Afshan 13

Table 7.  Results of the Error Correction Model of Exchange Rate

Variables Coefficient t–stats Prob.

C 0.560 1.267 0.214
∆GDP –0.298 –1.633 0.113
∆INF 0.161 1.083 0.287
∆INT –0.177 –1.092 0.283
∆MS 0.204 0.634 0.531
∆TOT –0.057 –2.061 0.048
∆TOP –0.210 –2.384 0.023
∆ECM –0.297 –2.130 0.041
Adj. R2 0.543
DW stats 1.809
F–stats (prob) 12.859 (0.000)
Source: Authors’ estimation.

(2011) and Khattak et al. (2012). It is concluded that the GDP, terms of trade, trade openness, inflation
and money supply are the important factors to dictate the changes in the pattern of official exchange rate
of Pakistan. Interest rates show the negative bus insignificant impact on the exchange rates of Pakistan.
The ARDL-based error correction model (ECM) has been used to analyze the short-run relationship
among the considered variables. Table 7 represents the results of the error correction model. Results
indicate that the lagged error correction term for the estimated exchange rate equation is both negative
and statistically significant. This confirms a valid short-run relationship between exchange rate and the
predictors of this study in Pakistan. The coefficient of the error term showing the value of –0.297 suggests
that about 30 per cent of disequilibrium is corrected in the current year. Results also indicate the negative
and significant effect of terms of trade and trade openness on exchange rate in short run as well, while
the results of GDP, inflation, money supply and interest rate are found insignificant in short runs.

Sensitivity Analysis of Long-run Coefficients

In this section, to check the robustness of initial results of long-run coefficients, two different sensitivity
analyses have been performed, namely, DOLS and FMOLS.

Dynamic Ordinary Least Square

The robustness of the relationship between dependent variable and explanatory variables is first tested
through DOLS technique developed by Stock and Watson (1993). The estimation properties of DOLS
are different from simple OLS in many ways as this method involves estimating the dependent variable
on explanatory variable using the levels, leads and lags of the explanatory variable. This method resolves
the issues of small sample bias, endogeneity and serial correlation problems by adding the leads and lags
of the explanatory variable (Stock & Watson, 1993).
Table 8 represents the results of dynamic ordinary least square of the exchange rate model. We have
run our model of DOLS by taking a lead and lag of 1. Results confirm that the coefficients of all
determinants remain the same sign and significance after taking different lags and leads in the exchange
rate model.
14 Global Business Review 18(4)

Table 8.  Results of Sensitivity Analysis

DOLS FMOLS
Variables Coeff. t–stats Prob. Coeff. t–stats Prob.
C 0.986 0.928 0.360 0.986 0.188 0.854
GDP –0.070 –2.554 0.016 –0.076 3.978 0.000
INF 0.149 4.393 0.000 0.151 4.784 0.000
INT –0.028 –0.551 0.586 –0.019 –1.242 0.236
MS 0.418 14.601 0.000 0.444 11.487 0.000
TOT –0.271 –1.713 0.096 –0.216 –1.919 0.077
TOP –0.407 –6.766 0.000 –0.406 –3.835 0.002
Adj. R2 0.973 0.953
DW stats 1.892 1.552
Source: Authors’ estimation.

Fully Modified Ordinary Least Square (FMOLS)

The FMOLS technique developed by Phillips and Hansen (1990) is also used to analyze the robustness
of our initial results of ARDL-based coefficients models. The FMOLS provides the optimal estimates of
the co-integration equation (Bum & Jeon, 2005). The FMOLS modifies the OLS to control the problems
of serial correlation and endogeneity in the regressors that results from the existence of a co-integrating
relationship (see Hansen, 1995; Phillips & Loretan, 1991). The results of the FMOLS of the exchange
rate model are also presented in Table 8. Results of the FMOLS confirm that the coefficients of all
determinants remain the same sign and significance as in the ARDL-based coefficients model.
Results of both sensitivity analyses show that the coefficient of all the considered variables has remain
the same sign and significance even the magnitude is also almost the same as in the ARDL-based
coefficient model. These findings confirm that the initial results are robust.

Stability of Long-run Model: A Rolling Window Analysis

The stability of coefficients of the long-run model in the sample size is evaluated by using the rolling
window estimation method. Figures 1–6 and Table 9 represent the coefficients of each year of all the
considered explanatory variables by using the rolling window estimation method. Two standard deviation
bands show the upper and lower bounds.
Results suggest that GDP is having a positive coefficient in only 7 years, that is, 1981, 1993, 1994,
1995, 1999, 2006 and 2007. The negative coefficient has come in 26 years which significantly influence
the overall negative effect of economic growth on exchange rate in Pakistan. Results also suggest that
the impact of money supply on exchange rate remained positive throughout the complete sample from
1981 to 2013. Results also suggest that the impact of trade openness on exchange rate remained positive
throughout the sample apart from the years of 1989–1992 and 2000.
The outcome of the rolling window estimation method indicates the very mix effects of inflation on
the exchange rate of Pakistan. Results suggest the negative impact of inflation on exchange rate in 15
years out of the total 33 years, while in 18 years, the coefficients are found to be positive which
significantly influence the overall positive effect of inflation on exchange rate in Pakistan. Results
suggest that terms of trade is having a positive coefficient in only 7 years, that is, 1991, 1995–1999 and
2004. The negative coefficient has come in 26 years which significantly influence the overall negative
effect of terms of trade on exchange rate in Pakistan.
Raza and Afshan 15

Figure 1.  Coefficient of GDP and Its Two SE Bands Based on Rolling OLS (Dependent
variable: ER)
Source: Authors’ estimation.

Figure 2.  Coefficient of INF and Its Two SE Bands Based on Rolling OLS (Dependent variable: ER)
Source: Authors’ estimation.
16 Global Business Review 18(4)

Figure 3.  Coefficient of INT and Its Two SE Bands Based on Rolling OLS
(Dependent variable: ER)
Source: Authors’ estimation.

Figure 4.  Coefficient of MS and Its Two SE Bands Based on Rolling OLS (Dependent
variable: ER)
Source: Authors’ estimation.
Raza and Afshan 17

Figure 5.  Coefficient of TOT and Its Two SE Bands Based on Rolling OLS (Dependent
variable: ER)
Source: Authors’ estimation.

Figure 6.  Coefficient of TOP and Its Two SE Bands Based on Rolling OLS (Dependent
variable: ER)
Source: Authors’ estimation.
18 Global Business Review 18(4)

Table 9.  Long-run Coefficients

Year GDP INF INT MS TOT TOP

1981 0.067 0.120 0.381 0.033 –0.661 –0.684
1982 –0.071 0.067 0.311 0.144 –0.553 –0.844
1983 –0.165 –0.027 0.904 0.159 –1.072 –0.296
1984 –0.158 –0.183 0.700 0.326 –1.046 –0.193
1985 –0.112 –0.043 –0.515 0.636 –1.028 –0.702
1986 –0.025 –0.083 –0.464 0.664 –0.825 –0.404
1987 –0.156 0.175 –1.133 0.965 –1.139 –0.230
1988 –0.260 0.123 –0.749 0.891 –0.404 –0.009
1989 –0.170 0.091 –0.725 0.876 –0.092 0.087
1990 –0.054 0.251 –0.006 0.720 –0.020 1.151
1991 –0.073 0.172 –0.159 0.683 0.121 0.532
1992 –0.088 0.126 –0.081 0.580 –0.624 0.058
1993 0.029 0.051 –0.358 0.590 –1.146 –0.436
1994 0.026 0.101 –0.055 0.500 –0.194 –0.190
1995 0.021 0.036 0.072 0.484 0.060 –0.156
1996 –0.004 –0.355 0.164 0.552 0.249 –0.485
1997 –0.020 –0.400 0.188 0.552 0.236 –0.555
1998 –0.006 –0.003 0.200 0.446 0.327 –0.206
1999 0.024 0.119 0.159 0.299 0.126 –0.776
2000 –0.024 –0.103 0.174 0.581 –0.094 0.240
2001 –0.013 0.001 0.085 0.458 –0.027 –0.438
2002 –0.030 0.051 0.023 0.434 –0.061 –0.638
2003 –0.029 0.081 0.103 0.373 –0.016 –0.824
2004 –0.014 –0.040 0.330 0.361 0.272 –0.562
2005 –0.039 –0.028 0.218 0.394 –0.313 –0.589
2006 0.071 –0.112 0.313 0.367 –0.330 –0.545
2007 0.081 –0.112 0.363 0.354 –0.499 –0.521
2008 –0.056 0.016 0.156 0.373 –0.315 –0.838
2009 –0.147 –0.019 0.014 0.476 –0.212 –0.542
2010 –0.159 –0.003 –0.179 0.510 –0.312 –0.682
2011 –0.135 –0.059 –0.018 0.431 –0.059 –1.033
2012 –0.068 0.108 –0.052 0.442 –0.088 –0.555
2013 –0.121 0.020 0.005 0.483 –0.056 –0.386
Source: Authors’ estimation.

Stability of the Long-run Model

The evaluation of the stability of coefficient of the long-run model in the sample period is performed by
CUSUM and CUSUM of square test on recursive residuals. The systematic changes from the coefficient
of regression are detected using the CUSUM test, whereas the sudden changes from constancy of
regression coefficients are detected using the CUSUM of square test (Brown, Durbin, & Ewans, 1975).
The findings from Figures 7 and 8 indicate that both CUSUM and CUSUM of square tests lie within
the interval band at the level of significance of 5 per cent. This implies the absence of structural instability
in the residuals of the exchange rate model in the short run.
Raza and Afshan 19

Figure 7.  Plot of Cumulative Sum of Recursive Residuals. The Straight Lines Represent Critical Bounds at
5% Significance Level
Source: Authors’ estimation.

Figure 8.  Plot of Cumulative Sum of Squares of Recursive Residuals. The Straight Lines
Represent Critical Bounds at 5% Significance Level
Source: Authors’ estimation.
20 Global Business Review 18(4)

Causality Analysis
Granger (1969) causality test is a famous statistical approach to check the direction of causality between
dependent and independent variables. The analysis of causality in the studied exchange rate model has
been performed on lag one. In order to determine the optimal lag, Jones (1989) prefers the ad hoc
selection method for lag length in Granger causality over other methods of estimations.
The findings of Granger causality presented in Table 10 have disclosed the presence of a bidirec-
tional causal relationship of exchange rate with economic growth and trade openness in Pakistan.
However, the inflation, money supply and terms of trade possess the unidirectional causality which runs
from explanatory variable to exchange rate of the country.

Conclusion and Policy Implications

This study examines the determinants of exchange rate in Pakistan by using the time-series data from
1972 to 2013. The results of ARDL bound testing co-integration approach, J.J. co-integration approach
and Gregory and Hansen (1996) structural break co-integration approach confirm the significant long-
run relationship among the considered variables. The estimations of long run indicate the significant
negative association of exchange rates with terms of trade, trade openness and economic growth.
However, money supply and inflation rate have a positive and significant effect on exchange rates. The
outcomes of the error correction model suggest a negative and significant relationship of terms of trade
and trade openness on exchange rates of Pakistan in short run. However, all other variables are found
insignificant in the short run. Results of sensitivity analysis through DOLS and FMOLS approaches also
confirm the results of long run which proves that the initial results are robust.
Results of the rolling window estimation method and CUSUM and CUSUM-Q also show the stability
of coefficients in long run as well as in short run. The Granger causality test confirms the presence of a
bidirectional causal relationship of exchange rate with economic growth and trade openness in Pakistan.
However, the inflation, money supply and terms of trade possess the unidirectional causality which runs
from explanatory variable to exchange rate of the country.

Table 10.  Results of Granger Causality Test of Exchange Rate Model

Variables F-statistic Probability

GDPR does not Granger Cause ER 5.174 0.029
ER does not Granger Cause GDPR 4.279 0.046
INF does not Granger Cause ER 5.234 0.005
ER does not Granger Cause INF 1.374 0.269
MS does not Granger Cause ER 4.098 0.050
ER does not Granger Cause MS 0.639 0.429
TOPN does not Granger Cause ER 4.931 0.033
ER does not Granger Cause TOPN 6.212 0.017
TOT does not Granger Cause ER 3.384 0.030
ER does not Granger Cause TOT 0.492 0.690
INT does not Granger Cause ER 0.042 0.838
ER does not Granger Cause INT 0.006 0.937
Source: Authors’ estimation.
Note: The lag length of all focus variables is 1.
Raza and Afshan 21

In light of the above investigation, following policy implications are suggested. This study calls for
the need to have an anti-inflationary plan since the empirical results indicated the strong positive
correlation of inflation and money supply with exchange rate of Pakistan. Attempts to decrease the
inflation level by stressing strict monetary measures supplemented by tight management of capital
inflows will ultimately prevent appreciation of exchange rates. Capital inflows can be restricted by
having credit controls. State Bank of Pakistan can accomplish it by selling government bonds or treasury
securities in the open market. Selling bonds to public, financial institutions and commercial banks will
help in withdrawing large amount of capital from vaults and restrain the currency from circulation.
In order to curb inflation and limiting money supply, State Bank of Pakistan can also increase the
reserve requirements to restrict banks’ ability to create credit. If the percentage of deposits which a
commercial bank is required to hold is raised, the banks have to hold that amount and thus that money
cannot be circulated. In Pakistani scenario, the need to decline real consumption patterns especially in
foreign goods sector would be fruitful. Restricted import values resulted by increased tariff and duties
can improve terms of trade ratios. However, this should be accompanied by emphasis on the improvement
of domestic goods industries. Since the present situation of infrastructure of the country is inadequate to
instigate the advancement of domestic industry, improvement in power supply, transportation and
communication and law and order situation will motivate the confidence of investors and bring prosperity
in domestic production.
Emphasis on export is also required to boost trade liberalization and terms of trade ratios. In order to
increase the contribution of exports in openness of the economy, there is a need to compete in global
market with strengths of a country. Pakistan is a labour-intensive country. There is a need of priority for
the production and export of labour demanding products such as textile. This will boost export and
encourage reinvestment. Diversification is also a way to have prosperity in the domestic sector. The
utilization of export revenues enables diversification by reinvestments in widespread sectors. Diversifying
the industries in this way would result in making Pakistani economy less vulnerable to exogenous shocks.
In addition, much of the success of monetary policy is dependent on how much government budget
deficit is under control. Open market operation will not help if government does not follow fiscal
prudence. Therefore, government should manage their revenue and expenses in the most efficient
manner. The revenues should increase by enhancing the new investment opportunities in the country.
Similarly, the government expenses should be utilized on profitable ventures.
The present research has witnessed the contribution of monetary and fiscal variables to determine
exchange rates of Pakistan. A lot of plans and policies have been made to stop the increasing trend of
exchange rates but the government has failed to bring depreciation in it. Inconsistency in policies is the
major drawback for such a weak valuation of local currency in Pakistan. The shifts of preferences from the
change of governments have led to nullify the effect of prior effective policies. The general awareness
emphasizing long-term consistency in policies is required to get productive results. The present study may
guide policymakers in formulating conclusive monetary and fiscal policies to ascertain the less volatile
and productive exchange rate for Pakistan to get sustainable economic growth for a long span of time.

Acknowledgement
The authors are grateful to the anonymous referees of the journal for their extremely useful suggestions to improve
the quality of the article. Usual disclaimers apply.

Notes
1.  Countries are Chile, Cote D’ivoire, Ghana, India, Mali, Kenya and Mexico.
2.  Countries are Denmark, Finland, Norway and Sweden.
3.  Countries are Argentina, Colombia and Mexico.
22 Global Business Review 18(4)

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