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Do Money Or Oil And Crop Productivity Shocks Lead To Inflation: The Case Of Pakistan

  • Syed, Kanwar Abbas

The worst economic outcomes have been argued as a result of the mismanagement in money supply especially in 1929’s Great Depression, 1970’s Stagflation and 2008’s Economic depression in the global economy. However, economic recessions tend to appear after oil price phenomenon. In particular, the global inflationary pressures of 2008 became severe with the spikes up in oil prices as well as crop productivity shocks in the world economy including Pakistan. The object of the present paper is to discuss inflation in the framework of Monetary and external Oil Price Shocks, Crop Productivity Propositions, Inflation Inertia, and real GDP growth. The empirical studies broadly uphold the monetary explanation of inflation in the Pakistan’s economy. This paper offers the policy implication that the combination of monetary as well as productivity management is required to arrest inflationary pressures in the economy. In addition, we find the comprehensive evidence that food inflation is also a monetary phenomenon in the Pakistan’s economy. On the other hand, the continuous persistence in inflation inertia does not hold as a result of the absence of autocorrelation in money supply in AR (2) or higher process in the data. Oil prices in terms of domestic currency highlight the fact that the transmission channel of world shocks via exchange rate fluctuations leaves significant impacts upon domestic inflation in the economy.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 15223.

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Date of creation: 10 Apr 2009
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Handle: RePEc:pra:mprapa:15223
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  1. Browne, Frank & Cronin, David, 2006. "Commodity Prices, Money and Inflation," Research Technical Papers 16/RT/06, Central Bank of Ireland.
  2. Faiz Bilquees, 1988. "Inflation in Pakistan: Empirical Evidence on the Monetarist and Structuralist Hypotheses," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 27(2), pages 109-129.
  3. Juncal Cunado & Fernando Pérez de Gracia, 2004. "Oil Prices, Economic Activity and Inflation: Evidence for Some Asian Countries," Faculty Working Papers 06/04, School of Economics and Business Administration, University of Navarra.
  4. Laurence Ball, 2000. "Near-Rationality and Inflation in Two Monetary Regimes," Economics Working Paper Archive 435, The Johns Hopkins University,Department of Economics.
  5. Christiano, Lawrence J. & Eichenbaum, Martin & Evans, Charles L., 1999. "Monetary policy shocks: What have we learned and to what end?," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 2, pages 65-148 Elsevier.
  6. Robert B. Barsky & Lutz Kilian, 2001. "Do We Really Know that Oil Caused the Great Stagflation? A Monetary Alternative," NBER Working Papers 8389, National Bureau of Economic Research, Inc.
  7. Martin Melecky & Daniel Buncic, 2005. "An Estimated, New Keynesian Policy Model for Australia," Macroeconomics 0511026, EconWPA.
  8. Abbas, Syed Kanwar, 2008. "Global Food Crisis & Inflationary Pressures: Short and Medium to Long Term Policy Options," MPRA Paper 9981, University Library of Munich, Germany.
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