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Causality Between Money and Prices: Evidence from Pakistan

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  • Husain, Fazal
  • Mahmood, Tariq

Abstract

The objective of the paper is to re-examine the causal relationship between money and prices in Pakistan using recent data and employing cointegration and error correction models. Two measures of prices (CPI and WPI) and three measures of money stocks (M0, M1, and M2) were taken for the period July 1981 to June 1998. The analysis indicates a long run relationship between prices and M2 definition of money. The other definitions of money do not seem to be related with prices. The analysis further suggests a unidirectional causality running from money to prices and thus supporting the monetarists’s claim regarding the role of money. The results, however, are different from the findings of earlier studies in Pakistan which generally report bidirectionl causality between prices and money.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 5021.

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Date of creation: 1998
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Publication status: Published in The Pakistan Development Review 4.37(1998): pp. 1155-1161
Handle: RePEc:pra:mprapa:5021

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Keywords: Money; Prices; Pakistan; Causality; Long Run Relation;

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References

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  1. Bijan B. Aghevli & Mohsin S. Khan, 1978. "Government Deficits and the Inflationary Process in Developing Countries (Déficits publics et processus inflationniste dans les pays en développement) (Los déficit públicos y el proceso in," IMF Staff Papers, Palgrave Macmillan, vol. 25(3), pages 383-416, September.
  2. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, Econometric Society, vol. 55(2), pages 251-76, March.
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Cited by:
  1. Hussain, Karrar, 2009. "Causal Ordering Between Inflation and Productivity of Labor and Capital: An Empirical Approach for Pakistan," MPRA Paper 16486, University Library of Munich, Germany.
  2. 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.
  3. Nadia Saleem, 2008. "Measuring Volatility of Inflation in Pakistan," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, Department of Economics, The Lahore School of Economics, vol. 13(2), pages 99-128, Jul-Dec.
  4. 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, Department of Economics, The Lahore School of Economics, vol. 16(1), pages 95-110, Jan-Jun.
  5. 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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