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Inflation targeting and exchange rate pass through in Pakistan: Markov Switching Approach

Author

Listed:
  • Safia Minhaj

    (University of Karachi, Pakistan)

  • Mohammad Nishat

    (Institute of Business Administration, Karachi)

Abstract

This study uses Markov switching model to empirically track the existence of exchange rate pass through and inflation trends in Pakistan from 1982 to 2016. The results reveal a direct relationship between pass through and inflation. Furthermore, interest rate and trade variables have a significant impact on inflation. According to the smoothed probabilities, switches between regimes were sudden and sporadic till 1990, after which long spells were observed during high and low inflation regimes.

Suggested Citation

  • Safia Minhaj & Mohammad Nishat, 2018. "Inflation targeting and exchange rate pass through in Pakistan: Markov Switching Approach," Business Review, School of Economics and Social Sciences, IBA Karachi, vol. 13(2), pages 20-33, July-Dece.
    • Handle: RePEc:aho:journl:v:13:y:2018:i:2:p:20-33
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    File URL: https://businessreview.iba.edu.pk/articles/Inflationtargeting.pdf
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    References listed on IDEAS

    as
    1. Choudhri, Ehsan U. & Hakura, Dalia S., 2006. "Exchange rate pass-through to domestic prices: Does the inflationary environment matter?," Journal of International Money and Finance, Elsevier, vol. 25(4), pages 614-639, June.
    2. Goldfeld, Stephen M. & Quandt, Richard E., 1973. "A Markov model for switching regressions," Journal of Econometrics, Elsevier, vol. 1(1), pages 3-15, March.
    3. Engel, Charles & Hamilton, James D, 1990. "Long Swings in the Dollar: Are They in the Data and Do Markets Know It?," American Economic Review, American Economic Association, vol. 80(4), pages 689-713, September.
    4. Ilan Goldfajn & Sérgio Ribeiro da Costa Werlang, 2000. "The Pass-through from Depreciation to Inflation: A Panel Study," Working Papers Series 5, Central Bank of Brazil, Research Department.
    5. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-384, March.
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    Cited by:

    1. Abdul Jalil, 2020. "What Do We Know of Exchange Rate Pass Through?," PIDE Knowledge Brief 2020:5, Pakistan Institute of Development Economics.

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