Inflation Differential Pass-Through to Exchange Rate

Some Evidence From Pakistan

Bibliographic Data

ID3565391
AuthorsMuhammad Zakaria (0000-0001-5270-2694, COMSATS University Islamabad, corresponding author), Seemab Tanveer (COMSATS University Islamabad), Bashir Ahmed Fida (0000-0003-1916-2854, Modern College of Business and Science), Muhammad Iftikhar Ul Husnain (0000-0002-3313-1838, COMSATS University Islamabad)
Year2023
Volume13
Issue4
Publication date2023-10-01
Peer ReviewedYes
Open AccessYes
TypeARTICLE
VenueSAGE Open (JOURNAL)
Journal identifiersISSN: 2158-2440 • E-ISSN: 2158-2440
PublisherSAGE Publications Inc (PUBLISHER)
DOI10.1177/21582440231221316
OpenAlexW4390170105
LanguageEN
Citations received1
References cited35

Using regression and wavelet coherence techniques this paper tries to probe the validity of purchasing power parity (PPP) in Pakistan. For this purpose, monthly data is collected for nominal exchange rate and consumer prices of Pakistan and its 23 major trading partners for the flexible exchange rate period 1982M1 to 2020M12. The regression results show that in 12 countries inflation differential significantly positively affect exchange rate. Similarly, Granger causality results reveal that inflation differential causes exchange rates in 12 countries. Wavelet coherency results indicate that there is significant co-movements between inflation differentials and exchange rates in varying time and frequency domains in all countries. These results indicate the partial validity of PPP in Pakistan. These results suggest that by reducing its inflation Pakistan can stabilize its exchange rates. JEL Classifications: C14, E31, F31

Econometrics · Economics · Exchange rate · International Fisher effect · Monetary economics · Monetary policy · Nominal interest rate · Purchasing power parity · Real interest rate · Market Dynamics and Volatility · Monetary Policy and Economic Impact · Stock Market Forecasting Methods

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