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Synthesis of the Fiscal and Monetary Policies in Price Level Determination: Evidence from Pakistan

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  • Naeem Akram*
  • Syed Imran RAIS
  • Ihtsham Ul Haq PADDA**

    ()

Abstract

Price stability is one of the key objective of public policy. Ever increasing prices have negative implications for economic growth and poverty. The present study attempts to analyze; how prices in Pakistan are affected by monetary and fiscal policies. It analyzes the interaction of domestic debt, fiscal deficit, money supply and exchange rate with the price level, by applying the VAR decomposition, Granger causality and Impulse response models. The study uses data for the period 1973 to 2010. The results reveal that in Pakistan both Monetary and Fiscal policies play significant role in determination of prices. However, the role of fiscal policy is comparatively stronger than monetary policy as it has both direct and indirect impacts on prices. As the fiscal deficit and domestic debt also affects prices through money supply. Furthermore, the effects of inflationary expectations on prices are highest in magnitude. The study suggests that to cope with increasing prices the coordination between fiscal and monetary policies is necessary.

Suggested Citation

  • Naeem Akram* & Syed Imran RAIS & Ihtsham Ul Haq PADDA**, 2011. "Synthesis of the Fiscal and Monetary Policies in Price Level Determination: Evidence from Pakistan," Pakistan Journal of Applied Economics, Applied Economics Research Centre, vol. 21, pages 37-52.
  • Handle: RePEc:pje:journl:article11v
    as

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    References listed on IDEAS

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    1. Jerome Creel & Henri Sterdyniak, 2002. "The fiscal theory of the price level and sluggish inflation: how important shall the wealth effect be?," Documents de Travail de l'OFCE 2002-01, Observatoire Francais des Conjonctures Economiques (OFCE).
    2. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
    3. Mandilaras, Alexandros & Levine, Paul, 2001. "Public Debt and Inflation: The Role of Inflation-Sensitive Instruments," Manchester School, University of Manchester, vol. 69(0), pages 1-21, Supplemen.
    4. Attiya Y. Javid & Umaima Arif & Abdul Sattar, 2008. "Testing the Fiscal Theory of Price Level in Case of Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 47(4), pages 763-778.
    5. Schmitt-Grohe, Stephanie & Uribe, Martin, 2000. "Price level determinacy and monetary policy under a balanced-budget requirement," Journal of Monetary Economics, Elsevier, vol. 45(1), pages 211-246, February.
    6. Hanif, Muhammad N. & Arby, Muhammad Farooq, 2003. "Monetary and Fiscal Policy Coordination," MPRA Paper 10307, University Library of Munich, Germany.
    7. Stephen J. Turnovsky, 2000. "Methods of Macroeconomic Dynamics, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262201232, January.
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