Exchange Rate Policy Must Seek Undervaluation!

Durr-e-nayab , Omer Siddique

Abstract


This note provides overwhelming evidence that currency
undervaluation is beneficial for economic growth. A macro-econometric
model shows that the SBP continually used our scarce foreign exchange
reserves to keep the exchange rate arbitrarily overvalued throughout
history. This is one important factor that has contributed to our
repeated BOP crises and IMF programmes. We hope that this note will
inform the exchange rate policy to keep an undervalued target exchange
rate and not use reserves to fight overvaluation (see also Jalil,
2020).

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DOI: https://doi.org/10.30541/v60i1pp.85-91

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