Syed Shujaat Ahmed Department of Econometrics and Statistics, Pakistan Institute of Development Economics Abdul Qayyum Joint Direct, Pakistan Institute of Development Economics

 Introduction  A brief theoretical review  Methodology  Results and discussion  Conclusions and recommendations

Depreciation in Exchange Rate. (Golub, 1983) and (Krugman, 1983) Dutch Disease Syndrome Oil Price and Exchange Rate Exchange Rate Regimes Fluctuations due to exogenous events. Current account problem. Pakistan Impact of oil price shock stays for three months. Oil Prices dominate exchange rate by 10 percent during fifth period. (Jamali et.al,2011) Pakistan Exchange Rate and Oil Prices

To investigate the impact of oil prices on real effective exchange rate in Pakistan. OBJECTIVE-1 To investigate the impact of interest rate differential on real effective exchange rate in Pakistan. OBJECTIVE-2 To investigate the impact of regime switches on real effective exchange rate in Pakistan. OBJECTIVE-3

Sacrificing Trade balance approach. Exchange Rate movement in different directions. Krugman (1983) Dutch Disease Economics. Spending and Resource Movement Effect. Corden (1984) Uncovered Interest Rate parity. Nominal Exchange Rate, International Prices and Domestic Prices. Meese and Rogoff (1988) Generalized model for uncovered interest rate parity Flexible Price Equilibrium Throop (1993)

Theoretical Function e= Real Effective Exchange Rate Oil= Dubai Crude Oil Prices Ird= Interest Rate Differential Notations

 Based on the work of Beckmann and Czudaj (2013) who followed Krolzig (1997) who followed Hamilton (1989), model here used will be:

VariablesOrder of IntegrationSpecificationRegime Real Effective Exchange RateI(1)C,d,nt Interest Rate DifferentialI(1)C,d,nt Dubai Crude Oil PriceI(1)C,d,nt Real Effective Exchange Rate (Fixed) I(1)C,d,ntFixed Exchange Rate Regime is significant Real Effective Exchange Rate (Managed Floating) I(1)C,d,ntManaged Floating Exchange Rate Regime is insignificant. Real Effective Exchange Rate (Two- Tier) I(1)C,d,ntTwo-Tier Exchange Rate Regime is insignificant. Real Effective Exchange Rate (Unified) I(1)C,d,ntUnified Exchange Rate Regime is insignificant. Real Effective Exchange Rate (Floating) I(1)C,d,ntFloating Exchange Rate Regime is insignificant. Real Effective Exchange Rate (All Regimes) I(1)nC,nd,ntOnly Fixed Exchange Rate Regime is significant.

High Probability = Low Transition Probability = Low Probability = High Transition Probability = 0.606

 Fixed Exchange Rate regime is found to be significant while using it as dummy in unit root test.  Within regimes there is found a long run relationship between REER, Oil Prices and IRD.  In short run REER is having its impact by oil prices in 8 th month and also present a seasonal impact.  First regime is found to be persistent in comparison to second which is also evident from smooth regime and one-step ahead probabilities.

 Formulation of exchange stabilization fund to coup with shocks without transferring impacts to domestic money supply.  No need to intervene by SBP in the presence of this fund. This will also lead to no intervention by government.