The exchange rate and consumer prices in Pakistan: Is rupee devaluation inflationary?
Pakistan Development Review , Volume 41 - Issue 2 p. 107- 120
This paper challenges the popular view that devaluation of the rupee is inflationary. Recent developments in the theoretical literature we 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.