Oil Prices and REER with Impact of Regime Dummies

Abstract

This study is basically explores the long run relationship between REER, IRD and Oil Prices, with the use of dummies and interaction terms for exchange rate regimes in Pakistan. By using Hatemi – J residual based cointegration test. Test has modified by including level shift, level shift with trend and regime shift. The data span is from the period of 1982m01-2014m03 in case of Pakistan. Also negative relationship between IRD and REER is due to indirect relationship between inflation and nominal interest rate that leads to fall in exchange rate. Long run relationship has concluded from cointegration test between variables