Dynamics of Causality between Inflation Volatility and Exchange Rate Volatility in Pakistan: A Time Series Analysis
DOI:
https://doi.org/10.61506/01.00361Keywords:
Vector Error Correction Model, Volatility, Short-run, Long-run, Johansen Juselius CointegrationAbstract
This study investigates the dynamic relationship between inflation volatility and exchange rate volatility in Pakistan over the period from 1960 to 2023. Utilizing time series data, the study employes the Vector Error Correction Model (VECM) to analyze both short-run and long-run causality between these variables. The study has found bidirectional causality between exchange rate volatility and inflation volatility, indicating that fluctuations in one variable significantly influence fluctuations in the other, both in the short and long term. Based on the results of the study, it is suggested that to stabilize prices, policymakers should implement measures to stabilize the exchange rate and to stabilize the exchange rate, planners should adopt policies that stabilize the prices.
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