This paper re-examines the causal relationship between money and income and between money and prices in Pakistan. Using an annual data set for Fiscal Years 1959/60 to 2003/04 and employing Co-integration and Error Correction Models as well as the standard Granger Causality analysis we investigate the Bi-variate and Tri-variate causal relationships. The Co-integration analysis indicates, in general, the long run relationship among money, income, and prices. The Error Correction and Granger Causality framework suggest 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. Regarding the causal relationship between money and prices, the causality framework provides the evidence of bi-variate causality indicating that monetary expansion increases, and is also increased by inflation in Pakistan. However, Money supply seems to be the leader in this case.
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number
4892.
Length: Date of creation: Apr 2006 Date of revision: Publication status: Published in South Asia Economic Journal 1.7(2006): pp. 55-65 Handle: RePEc:pra:mprapa:4892
Find related papers by JEL classification: E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
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