Political Economy of Exchange Rate Misalignment - A Synthesis of Lessons For Pakistan (PB - 55)

Political Economy of Exchange Rate Misalignment - A Synthesis of Lessons For Pakistan (PB - 55)

Publication details

  • Tuesday | 18 Oct, 2016
  • Vaqar Ahmed, Sajid Amin Javed, Wajid Ali
  • Policy Briefs/Papers
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Sajid Amin Javed, Vaqar Ahmed & Wajid Ali
 
Introduction
  
This policy brief makes three important points regarding exchange rate misalignment in Pakistan2 . Firstly, that the Pakistani Rupee (PKR) has historically remained deviated from its equilibrium value. Secondly, that political and institutional set up has a strong association with nature and magnitude of exchange rate misalignment and that overvalued PKR is preferred by the policy offices in general. And thirdly, that the academic and research circles in Pakistan ignore the political and institutional drivers of misalignment of PKR. This has implications for monetary policy of the country as the State Bank of Pakistan assumes no misalignment in exchange rates while setting its policy objectives including inflation targeting and output growth. A misalignment in PKR can therefore distort effective monetary policy formulation. We further argue that assessments of misalignment of PKR while ignoring the political and institutional fundamentals produce erroneous estimates and incomplete analysis for policy formulation.