Inflation convergence : evidence from South Asia

This study utilizes Optimum Currency Area (OCA) and convergence theories to analyze ß-and σ-convergence in inflation rates for India, Nepal, Pakistan and Sri Lanka before and after the signing of the South Asian Association for Regional Cooperation (SAARC) trade agreement. The results show strong evidence in favor of inflation convergence over the entire sample period, but no evidence of inflation convergence for the pre-SAARC sub-period. These results suggest the positive impact of inception of SAARC on the state of inflation convergence in the region. The results of the a-convergence analysis are also positive.