ISSN: 1648 - 4460

International Journal of Scholarly Papers


Transformations  in
Business & Economics

Transformations in
Business & Economics

  • © Vilnius University, 2002-2010
  • © Brno University of Technology, 2002-2010
  • © University of Latvia, 2002-2010
The Causal Relationship between Inflation, Interest Rate and Exchange Rate: The Case of Pakistan
Muhammad Azeem, Babar Zaheer Butt, Kashif Ur Rehman

ABSTRACT. This study examines the causal relationship between exchange rate and its determinants in Pakistan. The study uses Granger Causality and Johansen and Juselius Co integration tests on monthly data of exchange rate, interest rate and inflation rate for the period starting from Jan 1998 to Dec 2008. On the basis of the results, the major findings of the study are (a) there exists unidirectional causal relationship from interest rate to exchange rate, exchange rate to inflation and interest rate to inflation (b) exchange rate and interest rate have long-term equilibrium relationship with inflation.

KEYWORDS: exchange rate, inflation rate, interest rate, causal relationship, developing countries, co-integration.

JEL classification: F31.

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Scholarly papers Transformations in Business & Economics
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