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Causality Between Money and Prices: Evidence from Pakistan

  • Husain, Fazal
  • Mahmood, Tariq

The objective of the paper is to re-examine the causal relationship between money and prices in Pakistan using recent data and employing cointegration and error correction models. Two measures of prices (CPI and WPI) and three measures of money stocks (M0, M1, and M2) were taken for the period July 1981 to June 1998. The analysis indicates a long run relationship between prices and M2 definition of money. The other definitions of money do not seem to be related with prices. The analysis further suggests a unidirectional causality running from money to prices and thus supporting the monetarists’s claim regarding the role of money. The results, however, are different from the findings of earlier studies in Pakistan which generally report bidirectionl causality between prices and money.

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File URL: http://mpra.ub.uni-muenchen.de/5021/1/MPRA_paper_5021.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 5021.

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Date of creation: 1998
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Publication status: Published in The Pakistan Development Review 4.37(1998): pp. 1155-1161
Handle: RePEc:pra:mprapa:5021
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  1. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
  2. Bijan B. Aghevli & Mohsin S. Khan, 1978. "Government Deficits and the Inflationary Process in Developing Countries (Déficits publics et processus inflationniste dans les pays en développement) (Los déficit públicos y el proceso inflaciona," IMF Staff Papers, Palgrave Macmillan, vol. 25(3), pages 383-416, September.
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