The Nexus between Foreign Remittances and Inflation: Evidence from Pakistan

The inflow of foreign remittances in Pakistan has been an important source of foreign exchange in Pakistan while economy of Pakistan being a consumption oriented society /economy makes it interesting to explore the nexus between foreign remittances and inflation in Pakistan. For this purpose, the present study attempts to examine the impact of foreign remittances on inflation in Pakistan covering a period (1980-2012). Stationary analysis of the model confirms that all the variables used in the model are integrated of order (I), therefore, the study applies Johansen Cointegration technique in order to check the long run behavior of inflation while to test the short run dynamics, the study uses Vector Error Correction Model (VECM). The empirical findings show that foreign remittances have significantly positive impact on inflation thus underlining the need to channelize foreign remittances into productive investment in order to boost up economic growth in order to counter the inflationary impact of remittances in Pakistan.