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Political Instability and Inflation in Pakistan

  • Khan, Safdar Ullah
  • Saqib, Omar Farooq

This study investigates the effects of political instability on inflation in Pakistan. Applying the Generalized Method of Moments and using data from 1951-2007, we examine this link in two different models. The results of the ‘monetary’ model suggest that the effects of monetary determinants are rather marginal and that they depend upon the political environment of Pakistan. The ‘nonmonetary’ model’s findings explicitly establish a positive association between measures of political instability and inflation. This is further confirmed on analyses based on interactive dummies that reveal political instability significantly leading to high (above average) inflation.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 13056.

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Date of creation: 15 Nov 2008
Date of revision: 02 Jan 2009
Handle: RePEc:pra:mprapa:13056
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  1. Saqib, Omar F & Omer, Muhamad, 2008. "Monetary Targeting in Pakistan: A Skeptical Note," MPRA Paper 14883, University Library of Munich, Germany.
  2. Alberto Alesina & Allan Drazen, 1989. "Why are Stabilizations Delayed?," NBER Working Papers 3053, National Bureau of Economic Research, Inc.
  3. M. Aynul Hasan & Ashfaque H. Khan & Hafiz A. Pasha & M. Ajaz Rasheed, 1995. "What Explains the Current High Rate of Inflation in Pakistan?," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 34(4), pages 927-943.
  4. Ari Aisen & Francisco José Veiga, 2005. "Does Political Instability Lead to Higher Inflation? A Panel Data Analysis," IMF Working Papers 05/49, International Monetary Fund.
  5. Blundell, R. & Bond, S., 1995. "Initial Conditions and Moment Restrictions in Dynamic Panel Data Models," Economics Papers 104, Economics Group, Nuffield College, University of Oxford.
  6. M. Ali Kemal, 2006. "Is Inflation in Pakistan a Monetary Phenomenon?," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 45(2), pages 213-220.
  7. Qayyum, Abdul, 2006. "Money, Inflation, and Growth in Pakistan," MPRA Paper 2055, University Library of Munich, Germany, revised 2006.
  8. Narayana R. Kocherlakota & Christopher Phelan, 1999. "Explaining the fiscal theory of the price level," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 14-23.
  9. International Monetary Fund, 2005. "Three Attempts at Inflation Forecasting in Pakistan," IMF Working Papers 05/105, International Monetary Fund.
  10. Zulfiqar Hyder & Sardar Shah, 2005. "Exchange Rate Pass-Through to Domestic Prices in Pakistan," Macroeconomics 0510020, EconWPA.
  11. Ehsan U. Choudhri & Mohsin S. Khan, 2002. "The Exchange Rate and Consumer Prices in Pakistan: Is Rupee Devaluation In Inflationary?," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 41(2), pages 107-120.
  12. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Oxford University Press, vol. 58(2), pages 277-297.
  13. Charles T. Carlstrom & Timothy S. Fuerst, 2000. "The fiscal theory of the price level," Economic Review, Federal Reserve Bank of Cleveland, issue Q I, pages 22-32.
  14. M Arellano & O Bover, 1990. "Another Look at the Instrumental Variable Estimation of Error-Components Models," CEP Discussion Papers dp0007, Centre for Economic Performance, LSE.
  15. Price, Simon & Nasim, Anjum, 1998. "Modelling inflation and the demand for money in Pakistan; cointegration and the causal structure," Economic Modelling, Elsevier, vol. 16(1), pages 87-103, January.
  16. Felix Hammermann, 2007. "Nonmonetary Determinants of Inflation in Romania: A Decomposition," Kiel Working Papers 1322, Kiel Institute for the World Economy.
  17. Abul F.M. Shamsuddin & Richard A. Holmes, 1997. "Cointegration test of the monetary theory of inflation and forecasting accuracy of the univariate and vector ARMA models of inflation," Journal of Economic Studies, Emerald Group Publishing, vol. 24(5), pages 294-306, October.
  18. Martin Paldam, 1987. "Inflation and political instability in eight Latin American countries 1946-83," Public Choice, Springer, vol. 52(2), pages 143-168, January.
  19. 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, 06.
  20. Jeffrey M. Wooldridge, 2001. "Applications of Generalized Method of Moments Estimation," Journal of Economic Perspectives, American Economic Association, vol. 15(4), pages 87-100, Fall.
  21. Carlo Cottarelli, 1998. "The Nonmonetary Determinants of Inflation: A Panel Data Study," IMF Working Papers 98/23, International Monetary Fund.
  22. Ashfaque H. Khan & Mohammad Ali Qasim, 1996. "Inflation in Pakistan Revisited," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 35(4), pages 747-759.
  23. Akhtar Hossain, 1990. "The Monetarist versus the Neo-Keynesian Views on the Acceleration of Inflation: Some Evidence from South Asian Countries (with Special Emphasis on Pakistan)," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 29(1), pages 19-32.
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