An Empirical Study on Asymmetric Exchange Rate Pass-Through to Sectorial Inflation of Pakistan

Abstract

This study empirically examined the exchange rate pass through (ERPT) in sectoral inflation of Pakistan for the period 2007M6 to M62018 by applying the Ordinary Least Square (OLS) model. The study has used consistent monthly data with 2007-08 base year. The empirical results showed that due to 1 percentage point increase in depreciation of Pak rupee against US dollar, monthly transport inflation increased by 0.90 percentage points, monthly restaurant inflation increased by 0.78 percentage points, monthly food inflation increased by 0.27 percentage points and monthly housing inflation increased by 0.32 percentage points in the long run. It means that exchange rate has positive and significant effect on monthly transport inflation, monthly restaurant inflation, monthly food inflation and monthly housing inflation. All required diagnostic tests have been performed to verify that there is no heteroscedasticity, no autocorrelation, stability of model, and normality of estimated residuals. The study concluded that ERPT may be estimated for inflation in sub-indices of CPI as a regular practice by monetary authorities to rationalize asymmetric effects of depreciation on different sectors of the economy