UNVEILING EXCHANGE RATE DYNAMICS: A MARKOV CHAIN MODELING OF PAKISTAN'S CURRENCY TRENDS AND PERSISTENCE PATTERNS

Abstract

In Pakistan, we fitted an advanced Markov chain model based on the daily and weekly currency rates. Based on each of these price indices, a sequence of daily exchange rates for prices (over the previous day) was calculated for 2282 days between January 2016 and March 2022. The estimated period was split into two 2282-day halves: pre-liberalization and post-liberalization. where return periods for these three exchange rate states, stable state probabilities, and state transition probabilities were estimated. Thus, the long-run probability (after the memory of the initial state is lost in the process of continuous transitions) of a positive currency, change (i.e., currency increasing) in the case of the daily and weekly exchange rate in any day in the period of January 2016 is 0.411. Hence the return period of inflation is 1/ 0.411= 2.44 days. This means that the pre-liberalization period witnessed on pre-dollar exchange rate increasing (as measured over the previous days) once on 2.44 days or about 3 times in 20 days. In Pakistan, it was discovered that the status of the exchange rate generally endures with a high likelihood and a significantly shorter return period. This suggests a high and affected exchange rate.