Unofficial and Official Exchange Rates Dynamics: A Case of Pakistan

Ali Farhan Chaudhry and Abdul Rauf Butt

Abstract

This empirical study has been undertaken to investigate dynamic relationship between nominal unofficial and official exchange rates of Pak-rupee against US$ by using ARDL and error correction models. Monthly data for the period of 1948M04 to 2001M06 has been used. Statistical results conclude that both exchange rates are cointegrated. Error correction mechanism also confirms 
existence of long run relationship between two nominal exchange rates. Further, estimated error correction term indicates that nominal unofficial exchange rate corrects last month’s disequilibrium at the speed of 6.0972 
percent. Toda and Yamamoto (1995) causality test indicates that causality does exist from nominal unofficial to official exchange rate in case of Pakistan. Restoration of nominal unofficial exchange rate to long run equilibrium implies that short-term fluctuations in official exchange rate can be forecasted in developing countries like Pakistan and central bank can align official exchange rate with unofficial exchange rate