Understanding Inflation Dynamics: A Comparative Study of Pakistan, India, Bangladesh, and Sri Lanka

Abstract

The study examines the link between inflation and inflation uncertainty in South Asia, focusing on Pakistan, India, Bangladesh, and Sri Lanka. Inflation erodes purchasing power and raises uncertainty that discourages investment. Policymakers require evidence on persistence and asymmetric responses. CPI annual series (1995-2024) from the World Bank were tested for stationarity and modeled with ARCH, GARCH, and EGARCH to capture volatility clustering and asymmetry. Directionality was assessed with Granger causality. The results show that inflation has persistence across all four economies; India’s lag term is highly significant. Pakistan’s dynamics are best captured by EGARCH (1,1) with asymmetry. Sri Lanka and Bangladesh show volatility clustering and leverage effects; EGARCH fits Sri Lanka best, while Bangladesh exhibits weaker Policymakers should prioritize disinflation via credible monetary anchors and fiscal discipline, alongside targeted safety nets.