Abstract
This study empirically investigates real exchange rate between Pak Rupee and US Dollaremploying a two state Markov Switching-AR Model. Bai-Perron test for multiple structural breaks foundthree structural breaks in the series. Estimation results of Markov Switching-AR model reveal that if thereal exchange rate is in state one, its probability of staying in same state in the next period is greaterthan 99 percent whereas switching to second state is 0.7 percent. Whereas, if real exchange rate is instate two, its probability of staying to the same state is 99 percent and its probability of switching to stateone in the next period is less than 0.6 percent.
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