Abstract
This paper has produced a new evidence on exchange rate pass-through and pass-through of global energy prices on monthly inflation in Pakistan for the period 2007M6 to 2018M6. The study has used consistent monthly data of CPI inflation (MOM) with new base year 2007-08, which is distinction from previous empirical literature for Pakistan. The empirical results showed that exchange rate, output gap, global energy inflation and lagged inflation affect positively and significantly monthly inflation in Pakistan. Short run and long run exchange rate pass-through was found 0.16 and 0.42, respectively. It means that due to 1 percentage point increase in depreciation of rupee against US dollar, monthly inflation in current period increases by 0.16 percentage point and 0.42 percentage point in the long run. We have applied all necessary diagnostic tests to confirm the existence of no heteroscedasticity, no autocorrelation, stability of model and normality of estimated residuals. The study concluded that exchange rate-passthrough in short run and long run is significant and high in case of Pakistan. Therefore, exchange rate stability is important for controlling inflation in Pakistan.
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