An Empirical Investigation of Second Round Effect and Persistence of Food Inflation in Pakistan

Abstract

This study empirically investigated the persistence of food inflation and its Second Round Effect (SRE) in Pakistan. The study has used consistent time series monthly data from 2008M7 to 2018M6 to estimate persistence of inflation and SRE of food inflation on headline inflation. The study has applied backward linkage approach for estimating persistence of inflation and Ordinary Least Square (OLS) method to estimate SRE. The empirical analysis revealed that food inflation is relatively more persistent than non-food, headline, and core inflation in Pakistan. The results also indicated that SRE of food inflation exists in Pakistan as headline inflation catches up core inflation and gap between them reduces over the period. Findings of this study are consistent with recent empirical evidence found for other similar countries. The study recommended that in the presence of the SRE, for effective control on inflation the monetary policy should be formulated on headline inflation instead of core inflation and coordinated with fiscal policy.