Special Edition-07.pdf - Lahore School of Economics
Special Edition-07.pdf - Lahore School of Economics
Special Edition-07.pdf - Lahore School of Economics
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144<br />
M. Ashraf Janjua<br />
We have also derived a misalignment <strong>of</strong> the exchange rate which is<br />
percentage deviations <strong>of</strong> the actual REER from its equilibrium level. The<br />
misalignment is based on the model <strong>of</strong> the ERER. Negative and positive<br />
deviations reflect real appreciation/ depreciation <strong>of</strong> the actual REER from its<br />
equilibrium level.<br />
25.0<br />
Misalignment (in percent)<br />
Mis1<br />
20.0<br />
15.0<br />
10.0<br />
5.0<br />
0.0<br />
-5.0<br />
-10.0<br />
-15.0<br />
FY78<br />
FY79<br />
FY80<br />
FY81<br />
FY82<br />
FY83<br />
FY84<br />
FY85<br />
FY86<br />
FY87<br />
FY88<br />
FY89<br />
FY90<br />
FY91<br />
FY92<br />
FY93<br />
FY94<br />
FY95<br />
FY96<br />
FY97<br />
FY98<br />
FY99<br />
FY00<br />
FY01<br />
FY02<br />
FY03<br />
FY04<br />
FY05<br />
FY06<br />
FY07<br />
FY08<br />
FY09<br />
FY10<br />
The exchange rate misalignment ranged between -12.1% to 25.2%<br />
with zero reversion mean during the year 1978 and 2006. Furthermore,<br />
the actual REER in 2006 reflects an appreciation <strong>of</strong> the REER relative to<br />
the ERER. This suggests that the current exchange rate is away from the<br />
ERER.<br />
These results yield the following important policy implications for<br />
exchange rate policy in Pakistan:<br />
a) ERER is not fixed and is subject to variability as a result <strong>of</strong> changes<br />
in economic fundamentals.<br />
b) Fiscal policy is crucial to exchange rate stability in Pakistan.
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