Measuring real exchange rate misalignment: an industry-level analysis of Pakistan using ARDL approach

Abstract

Having an exchange rate close to its equilibrium is critical for foreign investors and policymakers during times of macroeconomic instability. This study measures the real exchange rate (RER) misalignment in eight Pakistani manufacturing industries from January 2002 to June 2020. The ARDL approach is used to examine the long-run relationship between the RER and its fundamentals in each industry. The findings show that government spending and interest rates significantly explain RER at the aggregate and industrial levels. Furthermore, the misalignment of RER varies significantly across industries. Some industries have highly misaligned RER, while others have close to zero misalignments. These findings can assist us in making fiscal policy and competitive devaluation decisions to improve the trade deficit.

Keywords:

• Real exchange rate misalignment
• industries
• ARDL
• Pakistan

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1. Although we do not need output data for the computation of real exchange rates, the data availability of industry-wise output is a matter of concern for calculating output growth.

2. Edwards (1987, Edwards, 1988, p. 1989), Afridi (1995), Chishti et al. (1993), and BOUZAHZAH and BACHAR (2014) use the growth rate of real GDP, while Balassa (1964) and Calderón (2005), use per capita income and the index of manufacturing output growth.

Additional information

Funding

This research is not funded by any organization.

Notes on contributors

Aqsa Shaukat

Aqsa Shaukat is a Doctoral researcher in the School of Economics at Quaid-e-Azam University, Islamabad, Pakistan. Her research interests include econometric modeling, macroeconomics, Globalization, and monetary policy.

Eatzaz Ahmad is a Professor on SBP Momerial Chair in School of economics at the Faculty of Quaid-e-Azam University, Islamabad, Pakistan. He has done his Ph.D from Canada. His research interests are Intertemporal Econ, Financial Economics, Macroecon, and Management Econometric modeling. He is also a reviewer for some journals.

Waseem Shahid Malik is an Associate Professor on the SBP Memorial Chair in the Department of Economics of the faculty of the University of Peshawar, Peshawar, Pakistan. He has done his Ph.D. from the Pide Institute of Development Economics, Islamabad, Pakistan. He has many contributions to making Monetary Policy and Fiscal year Budget at Provincial level in Pakistan. His research interest are Monetary policy, Macroecon, Budgetary policy, Time series Econometrics, and Healthecon.