Published Paper Details:

Abstract We examined the long-run relationship between the Rupee/Pakistani Rupee exchange rate (et) and relative price levels (pt) of India and Pakistan using quarterly data for 1976:1-2008:3. The secondary datasets on exchange rates and wholesale/consumer price indices, sourced from various issues of the International Financial Statistics (IMF), form the empirical base. Both series were found to be non-stationary in levels and stationary at first differences, confirming their I(1) nature in each sub-periods. Johansen cointegration analysis was applied separately to the periods 1976:1-1998:3 and 1998:4-2008:3. For the first sub-period, no cointegration was detected, indicating the absence of a long-run equilibrium relation between exchange rate movements and relative price levels in the economy of Pakistan. This suggested that the Purchasing Power Parity (PPP) doctrine and the associated Law of One Price (LOOP) did not hold between India and Pakistan during that time. In contrast, for the second sub-period, one significant cointegrating vector was found, establishing a stable long-run relationship between et and pt. The results imply that, from 1998:4 onwards, relative price differentials played a meaningful role in exchange rate determination, lending empirical support to PPP and LOOP in the India-Pakistan context during 1998:4-2008:3.