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Money Supply, Deficit, and Inflation in Pakistan

Author

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  • Mohammad Aslam Chaudhary

    (Quaid-i-Azam University, Islamabad.)

  • Naved Ahmad

    (University of Karachi.)

Abstract

Inflation is a burning issue in Pakistan. It is generally felt that for several years Pakistan has had a double-digit inflation. The public sector has used a mix of policies to control inflation, and it is also held responsible for its creation. The consumer price index (CPI) increased over 11 percent in 1981-82, and over 12 percent in 1990-91. Similarly, sensitive price index (SPI) increased over 15 percent in 1981-82, and over 12 percent in 1990-91. The GDP deflator was also double-digit for several years. Inflation not only affects sectoral allocation and distribution of income but also generates poverty. A prescription might not be appropriate until the roots of the disease are carefully investigated, which is the very reason for carrying out this study. Studies by Hossain (1990) several others concluded that inflation is a monetary phenomenon in Pakistan, while Bilquees (1988) showed that structural factors explained the inflationary process in Pakistan. It is widely disagreed whether money supply is exogenous or endogenous. Vogel (1974), criticising the monetarist approach, argued that further research is needed on the determination of money supply. Given this background, this study is intended to identify the variables leading to inflation; the nature of money supply, endogenous or exogenous, is also analysed. Section 2 of the study provides a brief review of the literature. A model is developed to study the relationship among fiscal deficit, money supply, and inflation. Section 3 contains a description of the empirical results. Section 4 provides the conclusion and policy implications.

Suggested Citation

  • Mohammad Aslam Chaudhary & Naved Ahmad, 1995. "Money Supply, Deficit, and Inflation in Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 34(4), pages 945-956.
    • Handle: RePEc:pid:journl:v:34:y:1995:i:4:p:945-956
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    References listed on IDEAS

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    1. Protopapadakis, Aris A. & Siegel, Jeremy J., 1987. "Are money growth and inflation related to government deficits? evidence from ten industrialized economies," Journal of International Money and Finance, Elsevier, vol. 6(1), pages 31-48, March.
    2. Akhtar Hossain, 1990. "The Monetarist versus the Neo-Keynesian Views on the Acceleration of Inflation: Some Evidence from South Asian Countries (with Special Emphasis on Pakistan)," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 29(1), pages 19-32.
    3. Vogel, Robert C, 1974. "The Dynamics of Inflation in Latin America, 1950-1969," American Economic Review, American Economic Association, vol. 64(1), pages 102-114, March.
    4. Barnhart, Scott W. & Darrat, Ali F., 1988. "Budget deficits, money growth and causality: Further OECD evidence," Journal of International Money and Finance, Elsevier, vol. 7(2), pages 231-242, June.
    5. Faiz Bilquees, 1988. "Inflation in Pakistan: Empirical Evidence on the Monetarist and Structuralist Hypotheses," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 27(2), pages 109-129.
    6. De Haan, Jakob & Zelhorst, Dick, 1990. "The impact of government deficits on money growth in developing countries," Journal of International Money and Finance, Elsevier, vol. 9(4), pages 455-469, December.
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