Money, Income and Prices in Pakistan: A Bi-variat and Tri-varate Causility
This paper re-examines the causal relationship between money and income and between money and prices in Pakistan. Using an annual data set for Fiscal Years 1959/60 to 2003/04 and employing Co-integration and Error Correction Models as well as the standard Granger Causality analysis we investigate the Bi-variate and Tri-variate causal relationships. The Co-integration analysis indicates, in general, the long run relationship among money, income, and prices. The Error Correction and Granger Causality framework suggest a one way causation from income to money in the long run implying that probably real factors rather than money supply has played a major role in increasing Pakistan’s national income. Regarding the causal relationship between money and prices, the causality framework provides the evidence of bi-variate causality indicating that monetary expansion increases, and is also increased by inflation in Pakistan. However, Money supply seems to be the leader in this case.
|Date of creation:||Apr 2006|
|Date of revision:|
|Publication status:||Published in South Asia Economic Journal 1.7(2006): pp. 55-65|
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- Sims, Christopher A, 1972. "Money, Income, and Causality," American Economic Review, American Economic Association, vol. 62(4), pages 540-52, September.
- Schwert, G. William, 1987. "Effects of model specification on tests for unit roots in macroeconomic data," Journal of Monetary Economics, Elsevier, vol. 20(1), pages 73-103, July.
- James R. Barth & James T. Bennett, 1974. "The Role of Money in the Canadian Economy: An Empirical Test," Canadian Journal of Economics, Canadian Economics Association, vol. 7(2), pages 306-11, May.
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