Oil Prices and Exchange Rate with Impact of Pre-Dollar and Post-Dollar Regime Dummies

Abstract

This study explains the relationship between oil prices and exchange rate of Pakistan in the time when Pakistan didn’t adopt for dollar and when Pakistan adopted for dollar as standard currency. By following the approach used by (Meese and Rogoff, 1988) and (Throop,1993) Interest Rate Parity has been used to construct a model by using exchange rate of Pakistan, Dubai crude oil price and interest rate differential from period of 1970m-1 to 2017m05. Results of the analysis shows that all variable are found to be integrated at level after application of Bealieu and Miron Seasonal Unit Root test. Results of the relationship between oil prices and exchange rate show that oil price is impacting exchange rate positively, while interest rate differential is negatively influencing the exchange rate. While examining the results for impact of change in regime on exchange rate, structural shifts were prominent during managed floating regime and floating regime which were causing Changes in the exchange rate policies