3ON Pak rupee exchange rates: whether stock or flow matters?

This paper examines whether the monetary model or the flow model of exchange rate explains the long-run movements in Pak rupee exchange rates vis-à-vis the four major currencies - the US dollar, British pound, Swiss franc and Japanese yen - over the period 1983q1-2009q4. Results obtained by employing the Johansen and Juselius (1990) technique of cointegration are supportive of the monetary model in two Pak rupee exchange rates vis-à-vis the US dollar and the Swiss franc when both short- and long-run interest rates are used and of the flow model in three exchange rates vis-à-vis the British pound, Swiss franc and Japanese yen when the short-run interest rate is used. These results show that both stock equilibrium in capital markets and flow equilibrium in foreign exchange markets determine Pak rupee exchange rates.