IDEAS home Printed from https://ideas.repec.org/a/ris/buecqu/0012.html
   My bibliography  Save this article

Determining inflation as monetary or fiscal phenomenon: An empirical evidence from South Asia

Author

Listed:
  • Obaid, Shahid

    (Department of Business Administration, Sindh Madressatul Islam University, Karachi Pakistan.)

  • Baig, Mirza Aqeel

    (Economics Department, Institute of Business Management, Karachi Pakistan.)

  • Shah, Muzafar Ali

    (Department of Business Administration, Sindh Madressatul Islam University, Karachi Pakistan.)

Abstract

This paper examines the relation between monetary and fiscal indicators with rate of inflation and determine whether monetary or fiscal indicators cause and predict inflation in an economy. In order to determine this relationship, a sample of six South Asian countries are taken in this research i.e. Pakistan, Sri Lanka, Bangladesh, India, Bhutan and Nepal. Five independent variables act as factors of monetary and fiscal policies i.e. money supply, interest rate, exchange rate, government expenditure and budget deficit are included. Twenty-five years (1993-2017) historic data is incorporated to estimate regression and granger causality. Various econometric techniques and statistical tools are used to refine the model. Findings suggest that money supply, interest rate and exchange rate are significant. However, government expenditure and budget deficit reported insignificant. Further, inflation granger causes exchange rate and broad money granger causes inflation. It is extracted from granger causality that inflation predicts exchange rate and money supply predicts the rate of inflation.

Suggested Citation

  • Obaid, Shahid & Baig, Mirza Aqeel & Shah, Muzafar Ali, 2020. "Determining inflation as monetary or fiscal phenomenon: An empirical evidence from South Asia," BizEcons Quarterly, Strides Educational Foundation, vol. 6, pages 22-48.
    • Handle: RePEc:ris:buecqu:0012
    as

    Download full text from publisher

    File URL: http://bequarterly.rysearch.com/wp-content/uploads/2020/01/Obaid-et-al-2020.pdf
    File Function: Full text
    Download Restriction: olaniyievans@gmail.com
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Frederic S. Mishkin, 2008. "Exchange Rate Pass-Through And Monetary Policy," NBER Working Papers 13889, National Bureau of Economic Research, Inc.
    2. Girijasankar Mallik & Anis Chowdhury, 2002. "Inflation, government expenditure and real income in the long-run," Journal of Economic Studies, Emerald Group Publishing, vol. 29(3), pages 240-250, September.
    3. Lucas, Robert E, Jr, 1996. "Nobel Lecture: Monetary Neutrality," Journal of Political Economy, University of Chicago Press, vol. 104(4), pages 661-682, August.
    4. José Manuel Campa & Linda S. Goldberg, 2005. "Exchange Rate Pass-Through into Import Prices," The Review of Economics and Statistics, MIT Press, vol. 87(4), pages 679-690, November.
    5. Guerrero, Federico, 2006. "Does inflation cause poor long-term growth performance?," Japan and the World Economy, Elsevier, vol. 18(1), pages 72-89, January.
    6. Catao, Luis A.V. & Terrones, Marco E., 2005. "Fiscal deficits and inflation," Journal of Monetary Economics, Elsevier, vol. 52(3), pages 529-554, April.
    7. Lin, Hsin-Yi & Chu, Hao-Pang, 2013. "Are fiscal deficits inflationary?," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 214-233.
    8. Carl E. Walsh, 2003. "Monetary Theory and Policy, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262232316, December.
    9. Thomas J. Sargent & Neil Wallace, 1984. "Some Unpleasant Monetarist Arithmetic," Palgrave Macmillan Books, in: Brian Griffiths & Geoffrey E. Wood (ed.), Monetarism in the United Kingdom, pages 15-41, Palgrave Macmillan.
    10. -, 1988. "International economic highlights 1987," Oficina de la CEPAL en Washington (Estudios e Investigaciones) 28922, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    11. Woodford, Michael, 1994. "Monetary Policy and Price Level Determinacy in a Cash-in-Advance Economy," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 4(3), pages 345-380.
    12. Alesina, Alberto & Drazen, Allan, 1991. "Why Are Stabilizations Delayed?," American Economic Review, American Economic Association, vol. 81(5), pages 1170-1188, December.
    13. Devarajan, Shantayanan & Swaroop, Vinaya & Heng-fu, Zou, 1996. "The composition of public expenditure and economic growth," Journal of Monetary Economics, Elsevier, vol. 37(2-3), pages 313-344, April.
    14. Mr. Tim Callen & Dongkoo Chang, 1999. "Modeling and Forecasting Inflation in India," IMF Working Papers 1999/119, International Monetary Fund.
    15. Frederic S. Mishkin, 2000. "Inflation Targeting in Emerging-Market Countries," American Economic Review, American Economic Association, vol. 90(2), pages 105-109, May.
    16. O. Evans, 2019. "Money, Inflation and Output in Nigeria and South Africa: Could Friedman and Schwartz Be Right?," Journal of African Business, Taylor & Francis Journals, vol. 20(3), pages 392-406, July.
    17. Smith, Bruce D, 1985. "Some Colonial Evidence on Two Theories of Money: Maryland and the Carolinas," Journal of Political Economy, University of Chicago Press, vol. 93(6), pages 1178-1211, December.
    18. Ikechukwu Kelikume & Olaniyi Evans, 2015. "Inflation Targeting As A Possible Monetary Framework For Nigeria," The International Journal of Business and Finance Research, The Institute for Business and Finance Research, vol. 9(5), pages 71-81.
    19. Daniel Landau, 1985. "Government expenditure and economic growth in the developed countries: 1952–76," Public Choice, Springer, vol. 47(3), pages 459-477, January.
    20. Paul De Grauwe & Magdalena Polan, 2005. "Is Inflation Always and Everywhere a Monetary Phenomenon?," Scandinavian Journal of Economics, Wiley Blackwell, vol. 107(2), pages 239-259, June.
    21. Durevall, Dick, 1998. "The Dynamics of Chronic Inflation in Brazil, 1968-1985," Journal of Business & Economic Statistics, American Statistical Association, vol. 16(4), pages 423-432, October.
    22. Evans, Olaniyi & Adeniji, Sesan & Nwaogwugwu, Isaac & Kelikume, Ikechukwu & Dakare, Olamitunji & Oke, Olubode, 2018. "The relative effect of monetary and fiscal policy on economic development in Africa: a GMM approach to the St. Louis equation," BizEcons Quarterly, Strides Educational Foundation, vol. 2, pages 3-23.
    23. Jonathan Temple, 2000. "Inflation and Growth: Stories Short and Tall," Journal of Economic Surveys, Wiley Blackwell, vol. 14(4), pages 395-426, September.
    24. Sargent, Thomas J & Wallace, Neil, 1982. "The Real-Bills Doctrine versus the Quantity Theory: A Reconsideration," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1212-1236, December.
    25. Cukierman, Alex & Edwards, Sebastian & Tabellini, Guido, 1992. "Seigniorage and Political Instability," American Economic Review, American Economic Association, vol. 82(3), pages 537-555, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Hicham Ayad, 2020. "Money Supply, Inflation and Economic Growth: Co-Integration and Causality Analysis," Studia Universitatis Babeș-Bolyai Oeconomica, Sciendo, vol. 65(2), pages 29-45, August.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. 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.
    2. Hossein-Ali Fakher, 2016. "The Empirical Relationship between Fiscal Deficits and Inflation (Case Study: Selected Asian Economies)," Iranian Economic Review (IER), Faculty of Economics,University of Tehran.Tehran,Iran, vol. 20(4), pages 551-579, Autumn.
    3. Philipp F. M. Baumann & Enzo Rossi & Alexander Volkmann, 2020. "What Drives Inflation and How: Evidence from Additive Mixed Models Selected by cAIC," Papers 2006.06274, arXiv.org, revised Aug 2022.
    4. Ismail O. Fasanya & Ayinke Fajobi & Abiodun Adetokunbo, 2021. "Are Fiscal Deficits Inflationary In Nigeria? New Evidence From Bounds Testing To Cointegration With Structural Breaks," Economic Annals, Faculty of Economics and Business, University of Belgrade, vol. 66(228), pages 123-148, January –.
    5. Minea, Alexandru & Tapsoba, René, 2014. "Does inflation targeting improve fiscal discipline?," Journal of International Money and Finance, Elsevier, vol. 40(C), pages 185-203.
    6. Bilal Raza & Khurram S Mughal, 2022. "Fiscal Determinants of Inflation in Pakistan," SBP Working Paper Series 108, State Bank of Pakistan, Research Department.
    7. Christoph S. Weber, 2018. "Central bank transparency and inflation (volatility) – new evidence," International Economics and Economic Policy, Springer, vol. 15(1), pages 21-67, January.
    8. Nasir, Muhammad Ali & Duc Huynh, Toan Luu & Vo, Xuan Vinh, 2020. "Exchange rate pass-through & management of inflation expectations in a small open inflation targeting economy," International Review of Economics & Finance, Elsevier, vol. 69(C), pages 178-188.
    9. Nasir, Muhammad Ali & Huynh, Toan Luu Duc & Yarovaya, Larisa, 2020. "Inflation targeting & implications of oil shocks for inflation expectations in oil-importing and exporting economies: Evidence from three Nordic Kingdoms," International Review of Financial Analysis, Elsevier, vol. 72(C).
    10. Akingbade U. Aimola & Nicholas M. Odhiambo & Christian Nsiah, 2021. "Public debt and inflation nexus in Nigeria: An ARDL bounds test approach," Cogent Economics & Finance, Taylor & Francis Journals, vol. 9(1), pages 1921905-192, January.
    11. Esat Durguti & Nexhat Kryeziu & Emine Gashi, 2020. "How Does the Budget Deficit Affect Inflation Rate-Evidence from Western Balkans," International Journal of Finance & Banking Studies, Center for the Strategic Studies in Business and Finance, vol. 9(1), pages 01-10, January.
    12. Sabaté, Marcela & Fillat, Carmen & Escario, Regina, 2019. "Budget deficits and money creation: Exploring their relation before Bretton Woods," Explorations in Economic History, Elsevier, vol. 72(C), pages 38-56.
    13. Lucotte, Yannick, 2012. "Adoption of inflation targeting and tax revenue performance in emerging market economies: An empirical investigation," Economic Systems, Elsevier, vol. 36(4), pages 609-628.
    14. Josh Ryan-Collins, 2015. "Is Monetary Financing Inflationary? A Case Study of the Canadian Economy, 1935-75," Economics Working Paper Archive wp_848, Levy Economics Institute.
    15. Jean‐Louis Combes & Xavier Debrun & Alexandru Minea & René Tapsoba, 2018. "Inflation Targeting, Fiscal Rules and the Policy Mix: Cross‐effects and Interactions," Economic Journal, Royal Economic Society, vol. 128(615), pages 2755-2784, November.
    16. Lin, Hsin-Yi & Chu, Hao-Pang, 2013. "Are fiscal deficits inflationary?," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 214-233.
    17. Antonio Afonso & Hüseyin Sen & Ayse Kaya, 2021. "Government Size, Unemployment and Inflation Nexus in Eight Large Emerging Market Economies," Hacienda Pública Española / Review of Public Economics, IEF, vol. 235(1), pages 133-170, March.
    18. Sen Gupta, Abhijit & Bhattacharya, Rudrani & Rao, Narhari, 2014. "Understanding Food Inflation in India," MPRA Paper 58319, University Library of Munich, Germany.
    19. Bennett T. McCallum & Edward Nelson, 2005. "Monetary and Fiscal Theories of the Price Level: The Irreconcilable Differences," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 21(4), pages 565-583, Winter.
    20. Léonce Ndikumana & Janvier D. Nkurunziza & Miguel Eduardo Sánchez Martín & Samuel Mulugeta & Zerihun Getachew Kelbore, 2023. "Monetary, fiscal, and structural drivers of inflation in Ethiopia: new empirical evidence from time series analysis," Review of Development Economics, Wiley Blackwell, vol. 27(2), pages 924-962, May.

    More about this item

    Keywords

    Monetary policy; Fiscal policy; Inflation;
    All these keywords.

    JEL classification:

    • A13 - General Economics and Teaching - - General Economics - - - Relation of Economics to Social Values
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ris:buecqu:0012. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Olaniyi Evans (email available below). General contact details of provider: https://bizecons.5profz.com/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.