146
Journal of Finance & Economics Research - Volume 1, Issue 2 2016
By Sajid Ali
10.20547/jfer1601204
Keywords: Exchange rate, interest rate, auto regressive distributed lag bound testing model (ARDL) and vector error correction model (VECM) analysis.
The purpose of this paper is to examine the long run as well as the short run relationship between exchange rate and interest rate in the context of Pakistan. Annual time series data have been used over the period of 1980 to 2015. Augmented Dickey-Fuller (ADF) unit root test, Johansen and Jeuuselius?s cointegration technique, auto regressive distributed lag (ARDL) bound testing model, error correction model (ECM), CUSUM and CUSUM of square tests for stability of model and, causality analysis in supporting variance decomposition and impulse response function are used to meet the research purpose. The study concluded the existence of a significant positive relationship between exchange rate and interest rate in the long run as well as in the short run in the context of Pakistan. These results are consistent with theoretical aspects. It is suggested that Pakistan should form economic, policies, especially monetary policy, keeping view the relationship between exchange rate and interest rate.