In Search of Exchange Rate Undershooting in Pakistan

Exchange rate behaviour does not follow very obvious and predicted pattern. Many attempts have been made to predict its behaviour as much as possible. This research re-examines the Dornbusch’s model of exchange rate overshooting caused by price rigidities. Dornbusch’s assumption of full employment in economy has been violated in this research which creates the possibility of exchange rate undershooting. In response to positive monetary shock, interest rate decreases and exchange rate undershoots its long run equilibrium. This research explains the dynamics of anti-intuitive exchange rate undershooting. Apart from theoretical formations of exchange rate undershooting, this research also analyses Pakistani data for exchange rate undershooting or overshooting in response to increase in money supply. Quarterly data of twenty three years for exchange rate, nominal interest rate, price, real output and money have been taken and vector autoregressive technique has been used. Evidence of exchange rate undershooting in response to positive money supply shock was found. It also gives an important insight into policy making by identifying some probable behaviour of exchange rate.

Consumer Imperfect Information and Endogenous Price Rigidity

This paper studies the propagation of monetary shocks in an economy featuring a strategic microfoundation for price rigidities. Following an aggregate shock to money, most consumers are initially uninformed. The market for goods is decentralized. Firms are better off delaying the adjustment of prices until enough consumers learn. At the same time, consumers learn from firms that have adjusted prices. The implied endogenous information diffusion follows a Bernoulli differential equation, implying a nonlinear path of learning. Nonlinear learning implies hump-shaped dynamics of output and inflation. A quantitative exercise suggests that these dynamics can be sizable and persistent. (JEL D11, D21, D40, D82, E23, E31)

DO PRICES CONVERGE AMONG INDONESIAN CITIES? AN EMPIRICAL ANALYSIS

We investigate consumer price convergence for 82 Indonesian cities using monthly data from 2014 to 2019. To do so, we employ recent techniques of club convergence and weak sigma convergence. The results reveal, first, consumer price divergence, implying price rigidities across the cities. Second, we find four clubs, suggesting that Indonesian cities converge along four unique transition paths. Third, we find weak evidence of consumer price convergence, suggesting that prices among Indonesian cities adjust, but not freely. Policy should therefore consider unique convergence paths for each club to promote stronger consumer price convergence.

FDI Asymmetries in Emerging Economies: The Case of Colombia

We build a DSGE model to study the asymmetries of FDI shocks in an economy like Colombia. Besides nominal wage and price rigidities, we use the fact that Colombia has two productive and differentiated regions, Bogota that produces more than 25% of Colombia GDP (DANE, 2016) and the rest of the country, Ricardian and non-Ricardian agents, habit formation, capital adjustment costs, and modeled an entire foreign sector. Empirical results show that even when in the long run results are not very different in terms of real output, the short run effects are asymmetric implying that a shock to FDI in the rest of the country might cause important microeconomic adjustments that could improve the distribution of income throughout the country.