6 research outputs found

    Exchange market pressure and monetary policy: A case study of Pakistan

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    Exchange Market Pressure refers to money market disequilibrium that arises due to non-zero excess demand for domestic currency in the foreign exchange market. Exchange rate changes reflect the extent of market pressure in the absence of Central Bank intervention. It is argued that nominal exchange rate changes have consequences for domestic macroeconomic variables. These include domestic output growth, increase in domestic prices, balance of trade, firms’ price-setting behaviour in high inflation countries, foreign debt burden of the country, balance of payments and the stability of the domestic financial system. It has been observed that the Central Banks generally intervene in the foreign exchange market to avoid these undesirable consequences of exchange rate changes. In this thesis, we construct exchange market pressure and intervention index for Pakistan using Weymark’s (1995) approach. The basic objective is to identify whether it is downward or upward pressure that has remained dominant over the entire sample period. Based on intervention index values, we evaluate the Central Bank’s monetary policy over the given sample period. In addition, we also calculate the actual exchange rate and predicted exchange rate using one period lagged exchange rate. We check whether monetary policy is successful in its objective of reducing exchange rate volatility. Finally, we also evaluate the determinants of exchange market pressure in a panel of ten countries. The first empirical chapter utilises difference data and the two-stage least square approach. In the second empirical chapter we adopt Johansen’s (1988) cointegration approach. Both of these provide evidence of downward pressure and active Central Bank intervention. Furthermore, these chapters show that the Central Bank’s foreign exchange intervention policy is fairly successful in achieving its objective of reducing exchange rate volatility. The initial empirical chapters use a fixed parameter approach. This has the disadvantage that it does not allow the estimated parameters to take account of structural changes. A third empirical chapter addresses this issue and uses the Kalman Filter Time Varying Parameter approach. This has the advantage of allowing the parameters to take account of the effects of structural changes on parameter constancy. The results show unstable estimated parameters. The constructed exchange market pressure and intervention index show downward pressure and the active Central Bank intervention. Thus, this chapter further confirms our earlier findings of downward pressure and active Central Bank intervention. However, despite unstable estimated parameters, Central Bank intervention policy is successful in reducing exchange rate volatility which is unexpected. In the earlier empirical chapters, we assumed direct Central Bank intervention. However, there may be the case that Central Bank may use interest rate for fending off speculative attack. In such a case it is better to include interest rate as component of exchange market pressure to truly reflect the extent of foreign exchange market disequilibrium. Last empirical chapter overcomes this issue and uses Eichengreen et al. (1996) approach for constructing exchange market pressure. It consists of percent changes in exchange rate, relative interest rate differential and relative percent changes in foreign exchange reserves. Furthermore, in this chapter, we evaluate the determinants of exchange market pressure in a panel of ten countries. The results indicate the relevancy of some macroeconomic variables and measures of openness

    Foreign Direct Investment and Trade Components in Context of Pakistan

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    Objective of this paper was to evaluate the impact of foreign direct investment (FDI) on trade components (exports and imports) of Pakistan using annual data from 1975 to 2013. Engle and Granger two step cointegration method was used for conducting the analysis. This method was adopted because all the variables of interest were non stationary in level and stationary at first difference. Results provide evidence of long run cointegrating relationship as well as short run relationship between FDI and trade components. A rise in FDI causes both exports and imports to increase. Based on these empirical findings, we strongly recommend Government of Pakistan to focus on the strategy of investment liberalization as well as trade openness

    Exchange Market Pressure and Intervention Index for Pakistan: Evidence from a Time-Varying Parameter Approach

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    The paper uses the approach of Weymark(1995) for constructing exchange market pressure andintervention index for Pakistan and to account for potentiallinearity. A rolling regression indicates unstable real moneydemand and price equation estimates. Consequently, a Kalmanfilter approach is used for evaluating the effects of structuralchanges on parameter constancy. The results indicate unstablereal money demand and price equation parameters. The evidenceshows downward pressure and active Central Bank intervention.Exchange Market Pressure mean value for the first half is higherthan the second half of the sample period suggesting the postreformperiod as more tranquil

    Sustainability of Global Economic Policy and Stock Market Returns in Indonesia

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    Interdependence in trade and financial globalization has increased the vulnerability of developed and developing countries to external shocks alike, whereas emerging markets are more vulnerable to the shocks originating from the world’s leading economies. This paper investigates the impact of the uncertainty from the global economic policy on the return of the Indonesian stock market by using the time-varying correlation based on the rolling window method and time-varying built dynamic conditional correlation method. Both the rolling window and condition correlation estimates indicate that the correlation between global policy uncertainty and Indonesian stock returns is time-varying. The results of the autoregressive distributed lag-based regression indicate that inflation, global crude oil prices, gross domestic product, and world crude oil production have significant impacts on the dynamic conditional correlation. The average negative estimate of time-varying correlation suggests that investors when faced with liquidity constraints in one country may sell off their assets in another country to raise funds in order to meet their future financial needs. This also indicates that the rise in the uncertainty of economic policy in developed markets has a negative impact on the shocks faced by the Indonesian stock market. Based on our empirical findings, it is recommended that Indonesian policymakers should place more focus on the sustainability of the economic growth, pay close attention to volatile crude oil prices, world crude oil production, and inflation so as to avoid dynamic interaction between the uncertainty of economic policy in the developed markets and the return of the Indonesian stock market

    Absorptive Capacity in Optimum Internal Utilization of Foreign Direct Investment in Pakistan

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    This paper examined the effect of Absorptive Capacity (ABC) on Foreign Direct Investment (FDI) in optimum internal utilization using Auto Regressive Distributed Lag Approach (ARDL). The results reveal the relevancy of human capital, patent application, electricity consumption, inflation, number of Doctor of Philosophy (Ph.D.), and trademark as determinants of FDI in Pakistan. In long run FDI is determined by human capital, patent right application, number of PhDs, electric power consumption, inflation, and trademark application while in short run lagged inflation and lagged trademark applications are the relevant arguments. An increase in human capital, patent application, and electricity consumption augments growth process of Pakistan, whereas a rise in the number of PhDs and trademark application retards growth process. Based on empirical evidence, it is recommended that the relevant authorities should formulate policies that augment factors causing FDI inflows and control those that retard it
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