“This paper investigates the relationship between domestic and foreign price levels and the exchange rate and other macro-variables. In the first part, the real exchange rate is estimated as a cointegrating vector that spans the variables in a purchasing power parity relation. In the second part, real income, domestic credit, and foreign exchange reserves are incorporated. The results show that exchange rate and the rate of inflation drive each other, foreign exchange reserves, domestic credit and the exchange rate drive each other, and domestic credit drives the rate of inflation with no reverse effects.”
