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Pride and Prejudice: Links between the Nominal Exchange Rates of Indian and Pakistani Currencies during 1957-1997

18 Pages Posted: 26 Apr 2005  

Tapen Sinha

Instituto Tecnológico Autónomo de México (ITAM) - Division of Actuarial Science, Statistics and Mathematics; Nottingham University Business School

Jayavel Sounderpandian

University of Wisconsin - Parkside - School of Business and Technology

Abstract

In theory, the exchange rate is assumed to respond to a number of economic factors such as the inflation rate differential, interest rate differential, and a number of other factors affecting expectations about the future. In practice, models of exchange rate that include economic variables tend to perform poorly against naïve random walk models. In the case of developing countries, their nominal exchange rate against powerful currencies such as the US dollar is sometimes seen as a symbol of pride and used as a source of political leverage. In this paper, we test this theory using the exchange rate data for two rival countries with a shared history: India and Pakistan. These two countries have no trade between them and their import and export patterns are completely different. Hence one would not expect any influence of one currency. But we find that Indian exchange rate influences Pakistan's and vice-versa, supporting the pride theory.

Keywords: Pride Theory, Exchange Rate, India, Pakistan, Cointegration

JEL Classification: F30

Suggested Citation

Sinha, Tapen and Sounderpandian, Jayavel, Pride and Prejudice: Links between the Nominal Exchange Rates of Indian and Pakistani Currencies during 1957-1997. Available at SSRN: https://ssrn.com/abstract=706102 or http://dx.doi.org/10.2139/ssrn.706102

Tapen Sinha (Contact Author)

Instituto Tecnológico Autónomo de México (ITAM) - Division of Actuarial Science, Statistics and Mathematics ( email )

Rio Hondo #1 Col. Tizapan San Angel
C.P. 01000 Del. Alvaro Obregon
52 55 5628 4088 (Phone)
52 55 5628 4086 (Fax)

Nottingham University Business School ( email )

Jubilee Campus
Wollaton Road
Nottingham, NG8 1BB
United Kingdom

Jayavel Sounderpandian

University of Wisconsin - Parkside - School of Business and Technology ( email )

Kenosha, WI 53141-2000

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