Bangladesh Bank Training Academy Journal

Abstract

This paper examines the impact of exchange rate variation on inflation in South Asian countries for the sample of the period 1981 to 2012 in a panel data framework rather than time series. The main purpose of this study is to examine whether exchange rate pass-through and/or volatility of exchange rate causes inflation in South Asian countries and what are the policy implications of it for the South Asian countries. This study first estimates inflation model for full sample (60 countries) and then estimates the inflation model for sub-sample of four South Asian countries (Bangladesh, India, Pakistan and Sri Lanka). For estimation of full sample this paper uses fixed effect model and GMM estimation techniques. In case of sub-sample (South Asian countries) this paper uses random effect model and GMM estimation techniques. While using full sample (for 60 countries), it is found that change in exchange rate has significant impact on inflation but exchange rate volatility has no impact on iflation. However, in case of South Asian countries both the exchange rate pass-through and volatility of exchange rate have significant impact on inflation. So, the policy makers of these four South Asian countries should take necessary steps for controlling inflation due to the volatility of exchange rate.