The Exchange Rates and Monetary Dynamics in Pakistan: An Autoregressive Distributed Lag (ARDL) Apporach

In this paper we investigate both the long and short run relationship between real money balances, real income, inflation rate,foreign interest rate and real effective exchange rate with reference to Pakistan over the period 1982Q2-2002Q4 using ARDL apporach which is a newly developed econometric technique. The estimate results indicate that in the long run real income,inflation rate, foreign interest rate and real effective exchane rate have a significant impact on real money balances in Pakistan. The dynamics of real money demand show that the effects of rate of inflation,foreign interest rate and the real effective exchange rate are much smaller in the short run than long run. the results also reveal that the demand for real money balances in Pakistan is stable, despite the economic reforms pursuede by the government since the late 1980s.