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The Impact of Changes in Exchange Rate on Prices: A Case Study of Pakistan

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  • Rehana Siddiqui

    (Pakistan Institute of Development Economics, Islamabad.)

  • Naeem Akhtar

    (Pakistan Institute of Development Economics, Islamabad.)

Abstract

Rapid changes in prices are of concern in almost all countries since the 1970s. However, the issue is of serious concern in developing countries where imported inflation is seen to be driving domestic inflation resulting in limited effectiveness of domestic policies to control inflation. Like most developing countries, in Pakistan also, the domestic price level started rising from the mid-1970s. The exchange rate started depreciating continuously from the early 1980s.1 Continuous devaluation of currency and inflation in the 1980s seems to suggest a correlation between the two variables. The empirical studies, like Rana and Dowling (1983) suggest that foreign inflation was the most significant factor in explaining changes in the domestic price level in nine Asian less developed countries during 1973–79. This suggests that, while, these countries could do little to control inflation, the policies of other countries, particularly their major trading partners, had a significant impact on their domestic prices. A simultaneous relationship between the inflation rate and the exchange rate changes is viewed by certain researchers to exist. [Cooper (1971) and Krugman and Taylor (1978).] In most of the developing countries flexibility of exchange rate is favoured on the ground that it depoliticises the problem of devaluation and creates less disruption in the economy. In the empirical literature, the exchange rate regimes are also linked to domestic prices, trade patterns and current account balance.

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Bibliographic Info

Article provided by Pakistan Institute of Development Economics in its journal The Pakistan Development Review.

Volume (Year): 38 (1999)
Issue (Month): 4 ()
Pages: 1059-1066

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Handle: RePEc:pid:journl:v:38:y:1999:i:4:p:1059-1066

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  1. Krugman, Paul & Taylor, Lance, 1978. "Contractionary effects of devaluation," Journal of International Economics, Elsevier, vol. 8(3), pages 445-456, August.
  2. Granger, C. W. J., 1988. "Some recent development in a concept of causality," Journal of Econometrics, Elsevier, vol. 39(1-2), pages 199-211.
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Cited by:
  1. Naz, Farah & Mohsin, Asma & Zaman, Khalid, 2012. "Exchange rate pass-through in to inflation: New insights in to the cointegration relationship from Pakistan," Economic Modelling, Elsevier, vol. 29(6), pages 2205-2221.
  2. Haider, Adnan & Khan, Safdar Ullah, 2007. "Does Volatility in Government Borrowing Leads to Higher Inflation? Evidence from Pakistan," MPRA Paper 17008, University Library of Munich, Germany.
  3. Jesus Felipe & J. S. L. McCombie & Kaukab Naqvi, 2010. "Is Pakistan's Growth Rate Balance-of-Payments Constrained? Policies and Implications for Development and Growth," Oxford Development Studies, Taylor & Francis Journals, vol. 38(4), pages 477-496.
  4. Ahmed, Shaghil & Ara, Iffat & Hyder, Kalim, 2005. "How External Shocks and Exchange Rate Depreciations Affect Pakistan? Implications for Choice of an Exchange Rate Regime," MPRA Paper 16247, University Library of Munich, Germany, revised Jan 2006.

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