The Exchange Rate and Consumer Prices in Pakistan: Is Rupee Devaluation Inflationary?

Ehsan U. Choudhri, Mohsin S. Khan

Abstract


This paper challenges the popular view that devaluation of the
rupee is inflationary. Recent developments in the theoretical literature
are reviewed to explain why consumer prices would be unresponsive to
exchange rate changes in the short run. Then empirical tests are
conducted for Pakistan during the period 1982 to 2001 to examine whether
inflation is systematically related to changes in the exchange rate. The
empirical analysis finds no association between rupee devaluations and
inflation in Pakistan. It appears, therefore, that concerns about the
inflationary consequences of rupee devaluation are unsupported by the
facts.

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DOI: https://doi.org/10.30541/v41i2pp.107-120

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