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Economic Liberalization and the Causal Relations among Money, Income, and Prices: The Case of Pakistan

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  • Husain, Fazal
  • Rashid, Abdul

Abstract

This study re-examines the causal relations between money and the two variables, i.e., income and prices. Using annual data from 1959/60 to 2003/04, examining the stochastic properties of the variables used in the analysis, and taking care of the shifts in the series due to the start of the economic liberalization program in the early 1990s, we investigate the causal relations between real money and real income, between nominal money and nominal income, and between nominal money and prices. The analysis indicates, in general, the long run relationship among money, income, and prices. The analysis further suggests a one way causation from income to money in the long run implying that probably real factors rather than money supply has played a major role in increasing Pakistan’s national income. The study fails to find the active role of money in changing income even after taking care of possible shifts in these variables due to the economic reforms. As Regards the causal relationship between money and prices, the analysis suggests a unidirectional causality from money to prices implying monetary expansion increases inflation in Pakistan.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 3195.

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Date of creation: 2006
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Handle: RePEc:pra:mprapa:3195

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Keywords: Money; Income; Prices; Economic Liberalization; Causal Relations; Pakistan;

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  1. Kalbe Abbas, 1991. "Causality Test between Money and Income: A Case Study of Selected Developing Asian Countries (1960-1988)," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 30(4), pages 919-929.
  2. James R. Barth & James T. Bennett, 1974. "The Role of Money in the Canadian Economy: An Empirical Test," Canadian Journal of Economics, Canadian Economics Association, vol. 7(2), pages 306-11, May.
  3. Schwert, G. William, 1987. "Effects of model specification on tests for unit roots in macroeconomic data," Journal of Monetary Economics, Elsevier, vol. 20(1), pages 73-103, July.
  4. Williams, David & Goodhart, C A E & Gowland, D H, 1976. "Money, Income, and Causality: The U.K. Experience," American Economic Review, American Economic Association, vol. 66(3), pages 417-23, June.
  5. Sims, Christopher A, 1972. "Money, Income, and Causality," American Economic Review, American Economic Association, vol. 62(4), pages 540-52, September.
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