Journal of Contemporary Issues in Business and Government

Abstract

This research study endeavor to inspect the influence of real effective exchange rate on level of
real GDP consumer price index (CPI) by using restricted VAR (VECM) econometrics approach
for Pakistan economy over the period 1980-2020. We examined the bivariate relationship
between real effective exchange rate and level of real GDP. It was concluded a negative
correlation between these two variables. Thelong-term interrelationship among real effective
exchange rate, CPI price level, and level of real GDP has also been examined by employing
Johansen co-integration. By utilizing various VECM models we have found the long-term
causality (A) from CPI price and level of output to the real effective exchange rate, and (B) from
the real effective exchange rate, CPI price level `and level of real output to M2 money supply
and (C) from the real effective exchange rate, M2 and real output level to CPI price level. The
money supply (M2) growth has a very strong positive impact on both levels of real GDP and CPI
level.