Determinants and Relationship Between Official and Parallel Exchange Rates: Evidence from Pakistan
Year: 2026
Type: article
Abstract: Introduction: This article examines the predictors of official and parallel open-market exchange rates in Pakistan. It also investigates whether both exchange rates move together. In addition, it identifies structural factors that drive persistent exchange-rate divergence. Methods: The analysis uses both an exchange-rate series and an additional ARDL model to investigate the relationship between official and parallel rates, employing a moving-average approach with annual data (1996-2025). The stability, speed of adjustment, and short- and long-run effects were evaluated using unit root tests and the ARDL model. Results: The ARDL analysis confirms a stable long-run relationship among macroeconomic indicators and exchange rates in a dual exchange rate system. In the long term, inflation and GDP are found to have positive, statistically significant impacts on both the official and parallel exchange rates. On the other hand, interest rates have a significant steadying impact. In the short run, adjustments in the exchange rate are primarily driven by variations in the interest rate and output shocks, whereas reserves and imports remain insignificant. Conclusion: The results point to Pakistan's susceptibility to inflationary forces, policy-rate distortions, and structural imbalances. Inflation stabilization, greater adequacy of reserves, and reduced regulatory distortions between the official and open markets are necessary to curb speculation, narrow premium gaps, and enhance exchange-rate stability.
Authors: Waleed Rafi, Ishtiaq Ahmad Bajwa
Institutions: Imam Abdulrahman Bin Faisal University, Al Yamamah University
Language: English
Domain: Social Sciences
Open Access status: hybrid
OpenAlex ID: W7204863390