IDEAS home Printed from https://ideas.repec.org/a/fej/articl/v5cy2011i2p51-62.html
   My bibliography  Save this article

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
    as

    Download full text from publisher

    File URL: http://www.fareastjournals.com/files/FEJPBV5N3P2.pdf
    Download Restriction: no
    File URL: http://www.fareastjournals.com/archive_detail.aspx?jid=18&aid=16
    Download Restriction: no
    ---><---

    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, April.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    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, October.
    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.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Fernando de Holanda Barbosa, 2017. "Hyperinflation: Inflation Tax and Economic Policy Regime," SpringerBriefs in Economics, in: Exploring the Mechanics of Chronic Inflation and Hyperinflation, chapter 0, pages 61-75, Springer.
    2. Stanley Fischer, 1991. "Growth, Macroeconomics, and Development," NBER Chapters, in: NBER Macroeconomics Annual 1991, Volume 6, pages 329-379, National Bureau of Economic Research, Inc.
    3. John Haltiwanger & Scott Schuh, 1999. "Gross job flows between plants and industries," New England Economic Review, Federal Reserve Bank of Boston, issue Mar, pages 41-64.
    4. repec:hum:wpaper:sfb649dp2009-020 is not listed on IDEAS
    5. Fredrik Carlsson & Dinky Daruvala & Olof Johansson‐Stenman, 2005. "Are People Inequality‐Averse, or Just Risk‐Averse?," Economica, London School of Economics and Political Science, vol. 72(287), pages 375-396, August.
    6. Christian Groth & Karl-Josef Koch & Thomas Steger, 2006. "Rethinking the Concept of Long-Run Economic Growth," CESifo Working Paper Series 1701, CESifo.
    7. J.P.G. Reijnders, 2007. "Impulse or propagation? How the tides turned in Business Cycle Theory," Working Papers 07-07, Utrecht School of Economics.
    8. Thomas Seegmuller, 2005. "Steady state analysis and endogenous fluctuations in a finance constrained model," Cahiers de la Maison des Sciences Economiques v05029, Université Panthéon-Sorbonne (Paris 1).
    9. Smulders, Sjak & Gradus, Raymond, 1996. "Pollution abatement and long-term growth," European Journal of Political Economy, Elsevier, vol. 12(3), pages 505-532, November.
    10. Andersen, Torben M., 2005. "Product market integration, wage dispersion and unemployment," Labour Economics, Elsevier, vol. 12(3), pages 379-406, June.
    11. Xavier Pautrel, 2015. "Abatement Technology and the Environment–Growth Nexus with Education," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 61(3), pages 297-318, July.
    12. McCallum, Bennett T, 2000. "Theoretical Analysis Regarding a Zero Lower Bound on Nominal Interest Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(4), pages 870-904, November.
    13. Radwanski, Juliusz, 2020. "On the Purchasing Power of Money in an Exchange Economy," MPRA Paper 104244, University Library of Munich, Germany.
    14. repec:hal:wpspec:info:hdl:2441/2961 is not listed on IDEAS
    15. Loewy, Michael B., 1995. "Equilibrium policy with dynamically naive agents," Journal of Macroeconomics, Elsevier, vol. 17(2), pages 319-331.
    16. Etienne Gagnon & David López-Salido & Nicolas Vincent, 2013. "Individual Price Adjustment along the Extensive Margin," NBER Macroeconomics Annual, University of Chicago Press, vol. 27(1), pages 235-281.
    17. Picard, Pierre M. & Toulemonde, Eric, 2006. "Firms agglomeration and unions," European Economic Review, Elsevier, vol. 50(3), pages 669-694, April.
    18. Franz R. Hahn, 2003. "Fully-Funded Public Old Age Pension Programs – Stranger Than Paradise?," WIFO Working Papers 203, WIFO.
    19. Torben M. Andersen, 2003. "Wage formation and European integration," European Economy - Economic Papers 2008 - 2015 188, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    20. Shinichi Nishiyama & Kent Smetters, 2006. "Social Security Privatization with Income-Mortality Correlation," Working Papers wp140, University of Michigan, Michigan Retirement Research Center.
    21. Lin, Hsin-Yi & Chu, Hao-Pang, 2013. "Are fiscal deficits inflationary?," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 214-233.
    22. Paul De Grauwe & Marianna Grimaldi, 2004. "Bubbles and Crashes in a Behavioural Finance Model," CESifo Working Paper Series 1194, CESifo.

    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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fej:articl:v:5c:y:2011:i:2:p:51-62. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Jim Chau (email available below). General contact details of provider: http://www.fareastjournals.com/journal_detail.aspx?jid=18 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.