Empirical Investigation of Real Exchange Rate between Pak Rupee and US Dollar Employing Markov Switching-AR Model
DOI:
https://doi.org/10.59263/gmjacs.12.02.2022.252Keywords:
Real Exchange Rate, Markov Switching Model, Structural Breaks, Non-Linear ModelsAbstract
This study empirically investigates real exchange rate between Pak Rupee and US Dollar
employing a two state Markov Switching-AR Model. Bai-Perron test for multiple structural breaks found
three structural breaks in the series. Estimation results of Markov Switching-AR model reveal that if the
real exchange rate is in state one, its probability of staying in same state in the next period is greater
than 99 percent whereas switching to second state is 0.7 percent. Whereas, if real exchange rate is in
state two, its probability of staying to the same state is 99 percent and its probability of switching to state
one in the next period is less than 0.6 percent.
