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Money, Inflation, and Growth in Pakistan

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  • Abdul Qayyum

    (Pakisatn Institute of Development Economics, Islamabad.)

Abstract

This paper attempts to investigate the linkage between the excess money supply growth and inflation in Pakistan and to test the validity of the monetarist stance that inflation is a monetary phenomenon. The results from the correlation analysis indicate that there is a positive association between money growth and inflation. The money supply growth at first-round affects real GDP growth and at the second round it affects inflation in Pakistan. The important finding from the analysis is that the excess money supply growth has been an important contributor to the rise in inflation in Pakistan during the study period, thus supporting the monetarist proposition that inflation in Pakistan is a monetary phenomenon. This may be due to the loose monetary policy adopted by the State Bank of Pakistan to show the high priority of the growth objective. The important policy implication is that inflation in Pakistan can be cured by a sufficiently tight monetary policy. The formulation of monetary policy must consider development in the real and financial sector and treat these sectors as constraints on the policy.

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Bibliographic Info

Article provided by Pakistan Institute of Development Economics in its journal The Pakistan Development Review.

Volume (Year): 45 (2006)
Issue (Month): 2 ()
Pages: 203-212

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Handle: RePEc:pid:journl:v:45:y:2006:i:2:p:203-212

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Keywords: Money Supply; Inflation; Growth; Quantity Theory; Monetory Policy; Pakistan;

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References

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  1. Bordo, Michael D. & Jonung, Lars, 1990. "The long-run behavior of velocity: The institutional approach revisited," Journal of Policy Modeling, Elsevier, vol. 12(2), pages 165-197.
  2. M Pesaran & Yongcheol Shin, 2004. "Long-Run Structural Modelling," ESE Discussion Papers 44, Edinburgh School of Economics, University of Edinburgh.
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  4. Cecchetti, Stephen G, 2000. "Making Monetary Policy: Objectives and Rules," Oxford Review of Economic Policy, Oxford University Press, vol. 16(4), pages 43-59, Winter.
  5. Abdul Qayyum & Faiz Bilquees, 2005. "P-Star Model: A Leading Indicator of Inflation for Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 44(2), pages 117-129.
  6. Allsop, Christopher & Vines, David, 2000. "The Assessment: Macroeconomic Policy," Oxford Review of Economic Policy, Oxford University Press, vol. 16(4), pages 1-32, Winter.
  7. M. Hashem Pesaran & Yongcheol Shin & Richard J. Smith, 2001. "Bounds testing approaches to the analysis of level relationships," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(3), pages 289-326.
  8. M. Aynul Hasan & Ashfaque H. Khan & Hafiz A. Pasha & M. Ajaz Rasheed, 1995. "What Explains the Current High Rate of Inflation in Pakistan?," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 34(4), pages 927-943.
  9. George T. McCandless, Jr. & Warren E. Weber, 1995. "Some monetary facts," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, pages 2-11.
  10. Gerald P. Dwyer, Jr. & R.W. Hafer, 1999. "Are money growth and inflation still related?," Economic Review, Federal Reserve Bank of Atlanta, issue Q2, pages 32-43.
  11. Md. Akhtar Hossain, 1986. "Monetary Disequilibrium and Inflation. A Monetary Model of Inflation in Pakistan, 1963-82," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 25(2), pages 141-162.
  12. Faiz Bilquees, 1988. "Inflation in Pakistan: Empirical Evidence on the Monetarist and Structuralist Hypotheses," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 27(2), pages 109-129.
  13. Robert J. Gordon, 1983. "The Conduct of Domestic Monetary Policy," NBER Working Papers 1221, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Saqib, Omar F & Omer, Muhamad, 2008. "Monetary Targeting in Pakistan: A Skeptical Note," MPRA Paper 14883, University Library of Munich, Germany.
  2. Siffat Mushtaq & Abdul Rashid & Abdul Qayyum, 2012. "On the Welfare Cost of Inflation: The Case of Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 51(1), pages 61-96.
  3. Sajid Amin Javed & Saud Ahmad Khan & Azad Haider & Farzana Shaheen, 2012. "Inflation and Inflation Uncertainty Nexus: Empirical Evidence from Pakistan," International Journal of Economics and Financial Issues, Econjournals, vol. 2(3), pages 348-356.
  4. Khan, Safdar Ullah & Saqib, Omar Farooq, 2011. "Political instability and inflation in Pakistan," Journal of Asian Economics, Elsevier, vol. 22(6), pages 540-549.
  5. Khalid Mushtaq & Abdul Ghafoor & Abedullah & Farhan Ahmad, 2011. "Impact of Monetary and Macroeconomic Factors on Wheat Prices in Pakistan: Implications for Food Security," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 16(1), pages 95-110, Jan-Jun.
  6. Nadia Saleem, 2008. "Measuring Volatility of Inflation in Pakistan," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 13(2), pages 99-128, Jul-Dec.
  7. Syed Kumail Abbas Naqvi & Bushra Naqvi, 2010. "Asymmetric Behavior of Inflation Uncertainty and Friedman-Ball Hypothesis: Evidence from Pakistan," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 15(2), pages 1-33, Jul-Dec.
  8. Jalil, Abdul & Tariq, Rabbia & Bibi, Nazia, 2014. "Fiscal deficit and inflation: New evidences from Pakistan using a bounds testing approach," Economic Modelling, Elsevier, vol. 37(C), pages 120-126.
  9. Khan, Rana Ejaz Ali & Gill, Abid Rashid, 2007. "Impact of Supply of Money on Food and General Price Indices: A Case of Pakistan," MPRA Paper 16293, University Library of Munich, Germany.

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