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Linear and nonlinear effect of exchange rate on inflation in Pakistan

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  • Kashif MUNIR

    (Al Qasimia University, Sharjah, United Arab Emirates)

Abstract

This study analyzes linear and nonlinear impact of exchange rate on inflation in Pakistan. Time series analysis is performed under ARDL and nonlinear ARDL framework to analyze that how in long and short run inflation get affected by exchange rate. Time series data (monthly) of Pakistan from 1980 (January) to 2019 (April) is utilized for analysis. ARDL model shows that real effective exchange rate has negative and significant impact on inflation in the long run, however, nonlinear ARDL (NARDL) model found that exchange rate deprecation increases inflation in long run, while appreciation decreases inflation in long run. The NARDL model proves that exchange rate has nonlinear effects on inflation in Pakistan. One-way causality exists from inflation to exchange rate as well as to appreciation of exchange rate in Pakistan. Government has to formulate policies to stabilize the exchange rate, while strong financial and capital markets are required to minimize risk of exchange rate to protect the international competitiveness.

Suggested Citation

  • Kashif MUNIR, 2022. "Linear and nonlinear effect of exchange rate on inflation in Pakistan," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 0(2(631), S), pages 165-174, Summer.
    • Handle: RePEc:agr:journl:v:2(631):y:2022:i:2(631):p:165-174
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    References listed on IDEAS

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    Cited by:

    1. Christina Anderl & Guglielmo Maria Caporale, 2023. "The Asymmetric Impact of Economic Policy and Oil Price Uncertainty on Inflation: Evidence from Developed and Emerging Economies," CESifo Working Paper Series 10276, CESifo.

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