Regime-Dependent Exchange Rate Pass-Through to Inflation: Evidence from Pakistan, 2016 to 2026

Abstract

Abdul Shaaf Asif

This paper examines whether Pakistani rupee depreciation transmits to consumer price inflation, and whether workers' remittances play an intermediating role, using ten years of monthly data (July 2016 to July 2026) from the State Bank of Pakistan. Using Augmented Dickey Fuller stationarity tests, Granger causality analysis, a two lag Vector Autoregression model, and impulse response analysis, the study finds no statistically significant relationship between workers' remittances and either the exchange rate or inflation at any tested lag. A baseline regression across the full sample suggests exchange rate depreciation explains approximately twelve percent of monthly inflation variation (R squared = 0.116, p < 0.001); however, this result does not survive removal of the 2022 to 2023 devaluation episode (R squared = 0.005, p = 0.496). Splitting the sample by exchange rate regime confirms that the relationship is negligible under Pakistan's pre 2022 managed exchange rate (R squared = 0.002, p = 0.714) and substantially stronger under the post 2022 market determined regime (R squared = 0.221, p < 0.001). These findings indicate that exchange rate pass through in Pakistan is regime dependent rather than constant, consistent with the broader emerging market literature on inflation environments and pass through intensity.

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