- PAKISTAN ECONOMIC and SOCIAL REVIEW, Vol # 59, Issue # 2
- ASYMMETRIES IN PASS-THROUGH OF CHANGES IN EXCHANGE RATE TO INFLATION IN PAKISTAN
ASYMMETRIES IN PASS-THROUGH OF CHANGES IN EXCHANGE RATE TO INFLATION IN PAKISTAN
- Muhammad Ejaz/
- MUHAMMAD NADIM HANIF/
- MUHAMMAD FAROOQ ARBY/
- December 31, 2021
We have investigated the effect of exchange rate changes to headline inflation in Pakistan using ARDL modeling approach. We have decomposed the change in nominal effective exchange rate for Q3:1992 to Q2:2017 period into positive and negative components and generated respective cumulative sums to explore if general price level adjusts differently to appreciation and depreciation. Our estimated markup model’s results show that pass-through of Pak Rupee depreciation to headline inflation rate is significant and is different for high inflation regime compared to low inflation regime. Pass-through of appreciation is found to be insignificant. Specifically, 1% depreciation in exchange rate increases inflation in Pakistan by 0.62% (0.48%) in the long run in high (low) inflation environment. These results vindicate price setting survey’s findings that (i) domestic firms follow monopolistically competitive structures resulting an incomplete pass-through; and (ii) depreciation is more important being reason for increasing the price compared to appreciation being reason for decreasing the price for manufacturing as well as services sector firms in Pakistan. We think asymmetry in exchange rate pass-through and its state dependency may exacerbate the trade-off between inflation and economic growth for the case of Pakistan and thus have implications for monetary policy conduct in Pakistan.
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