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Measuring Volatility of Inflation in Pakistan

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  • Nadia Saleem

    ()
    (GC University, Lahore.)

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    Abstract

    The available evidence in Pakistansuggests that inflation is a monetary phenomena. This paper examines the relationship between the determinants of inflation and its volatility by using monthly data for 1990:M1-2007:M5. The determinants of inflation are estimated by a VAR analysis, which shows that inflation, the interest rate and money supply move together. A VAR model assumes constant error variance. We relaxed this assumption by employing an ARCH/GARCH model and conclude that inflation is volatile in nature. For measuring the qualitative nature of the inflationary process we used an EGARCH model. It confirms that the time effect model is significant. It also suggests that in the first four months of the calendar year, the inflationary shock is negative and it can, therefore, hamper growth.

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    Bibliographic Info

    Article provided by Department of Economics, The Lahore School of Economics in its journal Lahore Journal of Economics.

    Volume (Year): 13 (2008)
    Issue (Month): 2 (Jul-Dec)
    Pages: 99-128

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    Handle: RePEc:lje:journl:v:13:y:2008:i:2:p:99-128

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    Keywords: Inflation; Volatility; Pakistan; Money Supply; Interest Rate.;

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    1. Lars E. O. Svensson, 1996. "Inflation Forecast Targeting: Implementing and Monitoring Inflation Targets," NBER Working Papers 5797, National Bureau of Economic Research, Inc.
    2. Abdul Qayyum, 2006. "Money, Inflation, and Growth in Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 45(2), pages 203-212.
    3. Elder, John, 2004. "Another Perspective on the Effects of Inflation Uncertainty," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(5), pages 911-28, October.
    4. International Monetary Fund, 2005. "Three Attempts At Inflation Forecasting in Pakistan," IMF Working Papers 05/105, International Monetary Fund.
    5. Tim Bollerslev, 1986. "Generalized autoregressive conditional heteroskedasticity," EERI Research Paper Series EERI RP 1986/01, Economics and Econometrics Research Institute (EERI), Brussels.
    6. Fazal Husain & Tariq Mahmood, 1998. "Causality between Money and Prices: Evidence from Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 37(4), pages 1155-1161.
    7. Friedman, Milton, 1977. "Nobel Lecture: Inflation and Unemployment," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 451-72, June.
    8. Frederic S. Mishkin & Adam S. Posen, 1998. "Inflation Targeting: Lessons from Four Countries," NBER Working Papers 6126, National Bureau of Economic Research, Inc.
    9. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
    10. Allan D. Brunner & David P. Simon, 1995. "Excess returns and risk at the long end of the Treasury market: an EGARCH-M approach," International Finance Discussion Papers 522, Board of Governors of the Federal Reserve System (U.S.).
    11. Ashfaque H. Khan & Mohammad Ali Qasim, 1996. "Inflation in Pakistan Revisited," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 35(4), pages 747-759.
    12. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-70, March.
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