Pakistan Economic and Social Review - Lahore


School of Economics, University of the Punjab, Lahore
ISSN (print): 1011-002X
ISSN (online): 2224-4174


  • Muhammad Ejaz/
  • December 31, 2021
Exchange Rate Pass-through, Inflation, Nonlinear ARDL Model, Asymmetric

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.


Abbas, H., Beg, S, and Choudhary, M. A. (2015). Inflation Expectations and Economic Perceptions in a Developing Country Setting. dsqx. sbp. org. pk/ccs/survey% 20information/paper. pdf.

Ahmad, E., and Ali, S. A. (1999). Exchange rate and inflation dynamics. The Pakistan Development Review, 235-251.

Ali, A. (2014). Share of imported goods in consumption of Pakistan. SBP Research Bulletin, 10(1).

Barhoumi, K. (2006). Differences in long run exchange rate pass-through into import prices in developing countries: An empirical investigation. Economic Modelling, 23(6), 926-951.

Belaisch, M. A. (2003). Exchange rate pass-through in Brazil (No. 3-141). International Monetary Fund.

Bhundia, A. (2002). An empirical investigation of exchange rate pass-through in South Africa (No. 2002-2165). International Monetary Fund.

Bollen, K. A., & Stine, R. A. (1992). Bootstrapping goodness-of-fit measures in structural equation models. Sociological Methods & Research, 21(2), 205-229.

Brouwer, G. D., and Ericsson, N. R. (1998). Modeling inflation in Australia. Journal of Business and Economic Statistics, 16(4), 433-449.

Bussiere, M. (2013). Exchange Rate Pass‐through to Trade Prices: The Role of Nonlinearities and Asymmetries. Oxford Bulletin of Economics and Statistics, 75(5), 731-758.

Bussière, M. (2007). Exchange rate pass-through to trade prices: the role of non-linearities and asymmetries.

Campa, J. M., Goldberg, L. S., and González-Mínguez, J. M. (2005). Exchange-rate pass-through to import prices in the Euro area (No. w11632). National Bureau of Economic Research.

Caselli, F. G. and Roitman, A. (2016). Non-linear exchange rate pass-through in emerging markets. International Monetary Fund.

Castro, R. H., and Niño, R. N. (2018). Nonlinear state and shock dependence of exchange rate pass-through  on prices (No. 690). Bank for International Settlements.

Cheikh, B. N. (2012). Asymmetric exchange rate pass-through in the Euro area: New evidence from smooth transition models. Economics: The Open-Access, Open-Assessment E-Journal, 6(2012-39), 1-28.

Choudhary, M. A., Naeem, S., Faheem, A., Hanif, N., and Pasha, F. (2011). Formal sector price discoveries: preliminary results from a developing country.

Choudhri, E. U., and Hakura, D. S. (2006). Exchange rate pass-through to domestic prices: does the inflationary environment matter? Journal of International Money and Finance, 25(4), 614-639.

Choudhri, E. U., and Khan, M. S. (2002). The exchange rate and consumer prices in Pakistan: is rupee devaluation inflationary? The Pakistan Development Review, 107-120.

Correa, A. D. S., and Minella, A. (2010). Nonlinear mechanisms of the exchange rate pass-through: A Phillips curve model with threshold for Brazil. Revista Brasileira de Economia, 64(3), 231-243.

Coulibaly, D., and Kempf, H. (2010). Does inflation targeting decrease exchange rate pass-through in emerging countries?

Delatte, A. L., and López-Villavicencio, A. (2012). Asymmetric exchange rate pass-through: Evidence from major countries. Journal of Macroeconomics, 34(3), 833-844.

Devereux, M. B., and Yetman, J. (2010). Price adjustment and exchange rate pass-through. Journal of International Money and Finance, 29(1), 181-200.

Duesenberry, J. (1950). The mechanics of inflation. The Review of Economics and Statistics, 144-149.

Edwards, S. (2006). The relationship between exchange rates and inflation targeting revisited (No. w12163). National Bureau of Economic Research.

Eun, C. S., and Jeong, J. G. (1999). International price level linkages: Evidence from the post-Bretton Woods era. Pacific-Basin Finance Journal, 7(3-4), 331-349.

Fernández, J. M. C., Mínguez, J. M. G., and Barriel, M. S. (2006). Non-linear adjustment of import prices in the European Union. Documentos de trabajo del Banco de España, (35), 1-43.

Forero, F. J. P., and Vega, M. (2015). Asymmetric exchange rate pass-through: Evidence from Peru. Central Bank of Peru Working Paper, 11.

Frankel, J., Parsley, D., and Wei, S. J. (2012). Slow pass-through around the world: a new import for developing countries? Open Economies Review, 23(2), 213-251.

Froot, K. A., and Klemperer, P. D. (1988). Exchange rate pass-through when market share matters.

Ghosh, A., and Rajan, R. S. (2009). Exchange rate pass-through in Korea and Thailand: Trends and determinants. Japan and the World Economy, 21(1), 55-70.

Goldberg, L. S. (1995). Product Differentiation and Oligopoly in International Markets: The Case of US Automobile Industries, Econometrica, 63(4), 891-951.

Goldberg, L. S., and Campa, J. M. (2010). The sensitivity of the CPI to exchange rates: Distribution margins, imported inputs, and trade exposure. The Review of Economics and Statistics, 92(2), 392-407.

Goldfajn, I., and Werlang, S. (2000). The pass-through from depreciation to inflation: a panel study.

Hanif, M. N. (2014), Monetary Policy Experience of Pakistan. MPRA Working Paper 60855

Hanif, M. N., Iqbal, J., and Khan, I. N. (2016). Global Commodity Prices and Inflation in a Small Open Economy (WP No. 76). State Bank of Pakistan, Research Department.

Hau, H. (2002). Real exchange rate volatility and economic openness: theory and evidence. Journal of Money, Credit, and Banking, 34(3), 611-630.

Hyder, Z., and Shah, S. (2005). Exchange rate pass-through to domestic prices in Pakistan (No. 0510020). EconWPA.

Khundrakpam, J. (2007). Economic reforms and exchange rate pass-through to domestic prices in India.

Knotek II, E. S. (2007). How useful is Okun's law? Economic Review-Federal Reserve Bank of Kansas City, 92(4), 73.

Kohlscheen, E. (2010). Emerging floaters: pass-through and (some) new commodity currencies. Journal of International Money and Finance, 29(8), 1580-1595.

Krol, R. (2014). Economic policy uncertainty and exchange rate volatility. International Finance, 17(2), 241-256.

Lopez-Villavicencio, A., and Mignon, V. (2016). Exchange rate pass-through in emerging countries: Do the inflation environment, monetary policy regime and institutional quality matter? CEPII WP, 7.

Mann, C. L. (1986). Prices, profit margins, and exchange rates. Fed. Res. Bull., 72, 366.

Marazzi, M., Sheets, N., Vigfusson, R., Faust, J., Gagnon, J., Marquez, J., and Rogers, J. (2005). Exchange rate pass-through to US import prices: some new evidence. International Finance Discussion Papers, 833.

Menon, J. (1996). The degree and determinants of exchange rate pass-through: market structure, non-tariff barriers and multinational corporations. The Economic Journal, 434-444.

McCarthy, J. (2007). Pass-through of exchange rates and import prices to domestic inflation in some industrialized economies. Eastern Economic Journal, 33(4), 511-537.

Otani, A., Shiratsuka, S., and Shirota, T. (2003). The decline in the exchange rate pass-through: evidence from Japanese import prices. Institute for Monetary and Economic Studies, Bank of Japan.

Ozkan, I., and Erden, L. (2015). Time-varying nature and macroeconomic determinants of exchange rate pass-through. International Review of Economics and Finance, 38, 56-66.

Pakistan, Ministry of Finance, Finance Division. (2017). Pakistan Economic Survey 2016-17 (p. 237). Islamabad.

Pesaran, M. H., Shin, Y., and Smith, R. J. (2001). Bounds testing approaches to the analysis of level relationships. Journal of applied econometrics, 16(3), 289-326.

Pollard, P. S., and Coughlin, C. C. (2004). Size matters: asymmetric exchange rate pass-through at the industry level.

Przystupa, J., and Wróbel, E. (2011). Asymmetry of the exchange rate pass-through: An exercise on polish data. Eastern European Economics, 49(1), 30-51.

Reinhart, C. M., Rogoff, K. S., and Savastano, M. A. (2014). Addicted to Dollars. Annals of Economics and Finance, 15(1).

Rincón, H., and Rodríguez, N. (2016). Nonlinear pass-through of exchange rate shocks on inflation: A Bayesian smooth transition VAR approach (No. 13-2016). Graduate Institute of International and Development Studies Working Paper.

Shin, Y., Yu, B., and Greenwood-Nimmo, M. (2014). Modelling asymmetric cointegration and dynamic multipliers in a nonlinear ARDL framework. In Festschrift in Honor of Peter Schmidt (pp. 281-314). Springer, New York, NY.

Shioji, E. (2012). The Evolution of the Exchange Rate Pass-Through in Japan: A Reevaluation Based on Time-Varying Parameter VARs. Public Policy Review, 8(1), 67-92.

Siddiqui, R., and Akhtar, N. (1999). The impact of changes in exchange rate on prices: a case study of Pakistan. The Pakistan Development Review, 1059-1066.

Stoian, A., and Murarașu, B. (2015). Occasional Papers No. 18. Occasional Papers, (18).

Stock, J. H., & Watson, M. W. (2011). Introduction to econometrics: Third edition. Boston, MA: Pearson Education.

Takhtamanova, Y. F. (2010). Understanding changes in exchange rate pass-through. Journal of Macroeconomics, 32(4), 1118-1130.

Taylor, J. B. (2000). Low inflation, pass-through, and the pricing power of firms. European economic review, 44(7), 1389-1408.

Timmer, C. P. (2008). Causes of high food prices (No. 128). ADB Economics Working Paper Series.

Tunc, C. (2017). A Literature Survey on Exchange Rate Transfers in Developing Countries. Bulletin of Economic Theory and Analysis, 2 (3), 205-233.

Webber, A. G. (1999). Dynamic and Long Run Responses of Import Prices to the Exchange Rate in the Asia‐Pacific. Asian Economic Journal, 13(3), 303-320.

Wickremasinghe, G., and Silvapulle, P. (2004). Exchange rate pass-through to manufactured import prices: The case of Japan. International Trade, 406006.

Yang, J. (2007). Is exchange rate pass-through symmetric? Evidence from US imports. Applied Economics, 39(2), 169-178

Zoli, E. (2009). Commodity Price Volatility, Cyclical Fluctuations, and Convergence: What is Ahead for Inflation in Emerging Europe? International Monetary Fund.




Muhammad Ejaz

Joint Director

State Bank of Pakistan, Karachi




Lead Statistician

State Bank of Pakistan, Karachi –Pakistan.



State Bank of Pakistan, Karachi




Type: Articles
Volume: 59
Issue: 2
Language: English
Id: 61fcd5a2e4075
Published December 31, 2021


  • 164
  • 74
  • 88


The research published by Pakistan Economic and Social Review (PESR) is licensed under Creative Commons Attribution 4.0 International License. It allows readers to Share_ copy and redistribute, Adapt_ remix and transform. PESR offers free full text downloading to its online contents to all readers. No subscription fee is required to read and download online articles.
Creative Commons License
This work is licensed under a Creative Commons Attribution 4.0 International License.