Rapid changes in prices are of concern in almost all countries
since the 1970s. However, the issue is of serious concern in developing
countries where imported inflation is seen to be driving domestic
inflation resulting in limited effectiveness of domestic policies to
control inflation. Like most developing countries, in Pakistan also, the
domestic price level started rising from the mid-1970s. The exchange
rate started depreciating continuously from the early 1980s.1 Continuous
devaluation of currency and inflation in the 1980s seems to suggest a
correlation between the two variables. The empirical studies, like Rana
and Dowling (1983) suggest that foreign inflation was the most
significant factor in explaining changes in the domestic price level in
nine Asian less developed countries during 1973-79. This suggests that,
while, these countries could do little to control inflation, the
policies of other countries, particularly their major trading partners,
had a significant impact on their domestic prices. A simultaneous
relationship between the inflation rate and the exchange rate changes is
viewed by certain researchers to exist. [Cooper (1971) and Krugman and
Taylor (1978).]
Commodity price stabilization and the developing countries
