Abstract – AOCRJ-V3I2P3

Predictions & Exchange Rate Dynamics

Ijaz Hussain Bokhari
University of Central Punjab, Lahore, Pakistan

Abstract:
The purpose of this study is to explore the behavior of exchange rates in five SARRC economies; namely Pakistan,India, Nepal, Bangladesh and Sri Lanka. Link between macroeconomic fundamentals and exchange rates has been investigated using ordinary least square method to test the explanation power of predictors, to explore the integration Johansen’s co-integration test has been implied and granger causality test has been used to test the casual relationship.
However, regression analysis proves that economic variables are not senseless, whereas Johansen co-integration technique affirm the existence of long run relationship between exchange rate and macro-economic variables. Vector Error Correction Mechanism has been applied to gauge the speed of adjustment in relationship between exchange rate and macroeconomic fundamentals.
Thus Pakistan and Sri Lanka aid the transmission channel of portfolio balance approach in the short run, while India supports the transmission channel of traditional approach toward relationship between macroeconomic variables and currency market. Though, in macroeconomic variables and currency exchange rates a feedback relationship has been measured, while analyzing Nepal and Bangladesh. This empirical research specifies that in scheming of exchange rate policies, causation must be a compulsory constituent. Then the relation of macroeconomic variables and exchange rates should also be considered by risk management process. The result of this research suggests that in long run these macroeconomic variables are controlled by the policy recommendations given by the regulators, but the instability of exchange rate is hard to be restricted or controlled by these macroeconomic variables policies.

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