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Determinants oF Recent Inflation in Pakistan

  • Khan, Abdul Aleem
  • Ahmed, Qazi Masood
  • Hyder, Kalim

The expansionary economic policies of the government and of the central bank (State Bank of Pakistan – SBP), which on one side resulted in impressive economic performance, stimulated a rise in the Consumer Price Index (CPI) on the other. This initiated a debate on the determinants of the recent inflation. Some blamed fiscal policy or monetary policy, while others blamed imported inflation, administered prices or mismanagement and loose control of the government. This study, adopting an econometric framework, focuses on the identification of the main determinants of recent inflation trends. Using data from the 1972-73 to 2005-06 period, applying ordinary least square method and verifying results through Breusch-Godfrey Serial Correlation LM and Augmented Dickey-Fuller tests, it finds that the most important determinants of inflation in 2005-06 were adaptive expectations, private sector credit and rising import prices. Whereas, the fiscal policy’s contribution to inflation was minimal.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 16254.

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Date of creation: 2007
Date of revision: 2007
Handle: RePEc:pra:mprapa:16254
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  1. Mohsin S. Khan & Axel Schimmelpfennig, 2006. "Inflation in Pakistan: Money or Wheat?," IMF Working Papers 06/60, International Monetary Fund.
  2. Easterly, William & Fischer, Stanley, 2001. "Inflation and the Poor," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(2), pages 160-78, May.
  3. Anna J. Schwartz, 1987. "Secular Price Change in Historical Perspective," NBER Chapters, in: Money in Historical Perspective, pages 78-109 National Bureau of Economic Research, Inc.
  4. Francisco Nadal-De Simone, 2000. "Forecasting Inflation in Chile Using State-Space and Regime-Switching Models," IMF Working Papers 00/162, International Monetary Fund.
  5. Jeannine Bailliu & Daniel Garcés & Mark Kruger & Miguel Messmacher, 2003. "Explaining and Forecasting Inflation in Emerging Markets: The Case of Mexico," Working Papers 03-17, Bank of Canada.
  6. Daniel Leigh & Marco Rossi, 2002. "Leading Indicators of Growth and Inflation in Turkey," IMF Working Papers 02/231, International Monetary Fund.
  7. Scheibe, Jörg & Vines, David, 2005. "A Phillips Curve for China," CEPR Discussion Papers 4957, C.E.P.R. Discussion Papers.
  8. 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.
  9. International Monetary Fund, 2005. "Three Attempts At Inflation Forecasting in Pakistan," IMF Working Papers 05/105, International Monetary Fund.
  10. Friedman, Milton, 1971. "A Monetary Theory of Nominal Income," Journal of Political Economy, University of Chicago Press, vol. 79(2), pages 323-37, March-Apr.
  11. M. Aynul Hasan & Qazi Masood Ahmed, 1991. "Endogeneity of Monetary Policy Reaction Function: An Experience from Pakistan's Economy," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 30(4), pages 931-941.
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