Foreign Exchange and Inflation in Pakistan: Evidence from ARDL Modelling Approach

Abstract

<p class="MsoNormal" style="text-align: justify; line-height: 150%; margin: 0in 0in 0pt;"><span style="line-height: 150%; font-size: 10pt;"><span style="font-family: Times New Roman;"><span style="mso-spacerun: yes;"> </span>Interest in detection of factors consider responsible for uneven fluctuation in steady state growth of world economies is long standing. There has been an explosion of theoretical literature and empirical evidences which think about compassionate to resolve the issue. Hike in prices of goods and services and foreign exchange are two important aspects which believe to blame for such bumpy vacillation in economic growth of the world economies like all other political, social and economic factors. It is true that both factors have inimitable significance for economic growth, but inquiry about internal relationships of above said both variables still has research thirst.<span style="mso-spacerun: yes;"> </span>The novelty of this research paper is, it provides the empirical evidence regarding the relationships between foreign exchange and inflation focusing on Pakistan experience since 1960. We use the Auto Regressive Distributive Lag Model (ARDL) proposed by Pesaran et al. (2001) in order to investigate the order of co-integration between inflation and foreign exchange through bound testing approach, and also use the OLS estimation to determine the long run relationship. Through econometric techniques, we trace the nature of relationship and speed of adjustment between concerned variables in response to fluctuation in level of foreign exchange. Empirical results indicate the negative correlation between the level of foreign exchange and rate of inflation in Pakistan during study period.<span style="mso-spacerun: yes;"> </span></span></span></p

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