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Yesterday @PIDEpk arranged an excellent discussion on exchange rate functioning in Pakistan. Led by @nadeemhaque and other economists, there seemed to be almost universal consensus that that FX should be allowed to be market based with a slight bias towards undervaluation.
Personally as I’m not too sure there should be any bias or favouring of exporters over domestic consumers. However, I’ll defer to the experts on that. They should know better. However one was a bit disappointed in the Q&A session with the response to a simple question, this is,
why despite there being clear understanding that Exchange rates should be left to the markets, there’s been persistent overvaluation? While national pride, machismo, ‘fixation’ and other nebulous reasons are often mentioned, rarely is the fact that there are economic agents who
benefit from such overvaluation and much less their being clearly identified. More importantly what’s there nexus with policy making at the top. Unless one missed something in the webinar, there appears to have been little research done on this other than anecdotal observations
While one assumes that policy makers act for greater good, general well being, etc, individual actors in a system act for self interest as they should and do so everywhere. In attributing irrationality to FX overvaluation are we missing out on influence of such self interest
Incidentally the factor of Exchange rate pass through vis a vis was also discussed and was quite revealing. Research seems to suggest that it’s impact on inflation is less than is popularly assumed to the case. So while it’s a reasonable fear factor it appears to be exaggerated
*vis a vis inflation
