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Fiscal deficit and its impact on inflation, Causality and Co-integration: The Experience of Pakistan (1960-2010)

Author

Listed:
  • Ammama

    (Department of Economics, Preston University Islamabad, Pakistan)

  • Dr. Khalid Mughal

    (Assistant Professor, Preston University Islamabad, Pakistan)

  • Dr. Muhammad Aslam Khan

    (Professor, Preston University Islamabad, Pakistan)

Abstract

The main objective of this paper is to examine the impact of fiscal deficit on inflation. The fiscal deficit in Pakistan continues to deteriorate and pose risks for sustainability of growth in the longer time horizon. This paper reexamines the issue in the light of broader data and such modeling approach which incorporates the key features of the theory. The paper establishes that within sample, inflation in Pakistan is mainly attributed to unsustainable fiscal deficit. The question whether fiscal deficit generates inflation in long term prespective or otherwise, Cointegration and Granger-causality test are employed. Secondary data from 1960 to 2010 show a strong relationship between fiscal deficit and inflation. Growth in deficits, whether measured by amounts or by deficit-output ratios, positively Granger causes inflation. So this study concluded that fiscal deficit displayed a powerful effect on inflation in Pakistan and there is need of coordination between monetary and fiscal policy to curb the inflation. From Engel-Granger cointegration test there exist a long run relationship between BD [budget deficit] and CPI [consumer price index].

Suggested Citation

  • Ammama & Dr. Khalid Mughal & Dr. Muhammad Aslam Khan, 2011. "Fiscal deficit and its impact on inflation, Causality and Co-integration: The Experience of Pakistan (1960-2010)," Far East Journal of Psychology and Business, Far East Research Centre, vol. 5(2), pages 51-62, December.
    • Handle: RePEc:fej:articl:v:5c:y:2011:i:2:p:51-62
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    References listed on IDEAS

    as
    1. Budina, Nina & Wijnbergen, Sweder van, 1995. "Fiscal Deficits, Monetary Reform and Inflation in Transition Economies: The Case of Bulgaria," East European Series 21, Institute for Advanced Studies.
    2. Budina, Nina & Wijnbergen, Sweder van, 1996. "Fiscal Deficits, Monetary Reform and Inflation: The Case of Romania," East European Series 37, Institute for Advanced Studies.
    3. S. Adnan & H.A.S. BUKHARI & Safdar Ullah KHAN, 2008. "Does Volatility In Government Borrowing Leads To Higher Inflation? Evidence From Pakistan," Journal of Applied Economic Sciences, Spiru Haret University, Faculty of Financial Management and Accounting Craiova, vol. 3(3(5)_Fall), pages 187-202.
    4. Olivier Jean Blanchard & Stanley Fischer, 1989. "Lectures on Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262022834, December.
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    Cited by:

    1. Bello, Abdulmajeed Kumo & Joshua Adams Ndako & Yusuf, Fadimah & Amodu Amina Ejura, 2023. "Fiscal Dominance and Monetary Policy Efficacy in Nigeria," International Journal of Research and Innovation in Social Science, International Journal of Research and Innovation in Social Science (IJRISS), vol. 7(10), pages 857-877, October.
    2. Abdul Jalil & Hafsa Hina (ed.), 2024. "Monetary Policy: Crafting a Path for Pakistans Economic Stability," PIDE Books, Pakistan Institute of Development Economics, number 2024:03.
    3. Ibrar Hussain & Muhammad Rafiq & Zahoor Khan, 2020. "An analysis of the asymmetric effect of fiscal policy on economic growth in Pakistan: Insights from Non-Linear ARDL," Business Review, School of Economics and Social Sciences, IBA Karachi, vol. 15(1), pages 19-49, January-J.
    4. Kashif Ali & Mahmood Khalid, 2019. "Sources to Finance Fiscal Deficit and Their Impact on Inflation: A Case Study of Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 58(1), pages 27-43.

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    More about this item

    Keywords

    Fiscal deficit; inflation; GDP (gross domestic product) growth; BDGDP (budget deficit ratio to GDP growth); Pakistan;
    All these keywords.

    JEL classification:

    • M1 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration

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