Exchange Rate Pass-through To Consumer Prices In Pakistan:does Misalignment Matter?
Author: Atif Ali Jaffri

This study investigates the impact of exchange rate changes on domestic consumer price inflation (commonly known as exchange rate pass-through (ERPT)) in Pakistan for the period 1993M7 to 2007M4. The model developed to estimate ERPT incorporates the existing level of real exchange rate misalignment as an independent variable besides nominal effective exchange rate (NEER) changes and foreign consumer price index (FCPI) changes. The equilibrium real exchange rate is estimated through behavioral equilibrium exchange rate (BEER) approach which benefits from the cointegration technique to estimate long run relationship between real effective exchange rate (REER) and fundamental determinants. The study concludes that the ERPT from NEER changes to CPI inflation in Pakistan is very low (close to zero). The impact of foreign inflation on domestic inflation is positive and statistically significant. The impact of previous period’s misalignment is found significant in managed exchange rate regime, however, in case of overall sample misalignment does not affect inflation. Low pass-through into consumer price inflation enhances effectiveness of nominal exchange rate as a shock absorber. The low pass-through into consumer price inflation is suitable for adoption of inflation targeting in Pakistan. It is important for policy makers to know both the level of misalignment and the degree of pass-through for effective implementation of monetary and exchange rate policies. Supervisor: Dr. Rehana Siddiqui Dean, Research, PIDE, Islamabad Co-supervisor: Dr. Shahnaz A. Rauf Team Leader, Academics, N.I.B.A.F, Islamabad

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Keywords : Exchange Rate Changes On Domestic Consumer Price Inflation
Supervisor: Rehana Siddiqui
Cosupervisor: Shahnaz A. Rauf

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