IDEAS home Printed from https://ideas.repec.org/a/pid/journl/v35y1996i4p761-771.html
   My bibliography  Save this article

Analysing Inflation: Monetary and Real Theories

Author

Listed:
  • M. Shaukat Ali

    (The Planning Commission, Government of Pakistan, Islamabad.)

Abstract

The paper seeks to analyse the inflationary trends observed in Pakistan in the recent past by applying both the monetary and real theories. The former explains inflation in terms of changes in liquidity per unit of real output and velocity whereas the latter makes use of real variables, especially, the structure of economy. Since the ratio between money spending (quantity of money times velocity) and real GDP defines general price level, monetary theory offers a natural tool for analysing inflation. Even factors like raising utility prices by the government or higher expected inflation add to inflation only when the additional demand for money generated by these factors is met with an accommodating increase in money supply (with stable velocity). During FY86 to 96 in Pakistan, money supply grew by 15.4 percent, GDP by 5.3 percent, and velocity by –0.24 percent. This yields an estimated inflation of 9.4 percent, very close to the actual one of 9.2 percent. Interestingly enough, more than half of the money expansion during the 90s emanated from credit for budgetary support, rendering the latter an active source of inflation. Under the real theory, we focused on full-cost-pricing wherein the market value-added price is defined as a weighted sum of various primary costs, e.g., wages, profits, and net indirect taxes. To capture the impact of terms of trade, foreign trade flows were added. It has been estimated that the overall inflation of 9.4 percent during FY86–95 was contributed to the extent of 5.6 points by profits, 2.2 points by wages, 0.9 by net indirect taxes and 0.7 by terms of trade. From policy perspective, monetary analysis has an edge over real analysis as controlling inflation through monetary management is relatively easier than through regulating various costs elements which go into the formation of price.

Suggested Citation

  • M. Shaukat Ali, 1996. "Analysing Inflation: Monetary and Real Theories," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 35(4), pages 761-771.
  • Handle: RePEc:pid:journl:v:35:y:1996:i:4:p:761-771
    as

    Download full text from publisher

    File URL: http://www.pide.org.pk/pdf/PDR/1996/Volume4/761-771.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Anna J. Schwartz, 1987. "Secular Price Change in Historical Perspective," NBER Chapters, in: Money in Historical Perspective, pages 78-109, National Bureau of Economic Research, Inc.
    2. Barro, Robert J, 1984. "Rational Expectations and Macroeconomics in 1984," American Economic Review, American Economic Association, vol. 74(2), pages 179-182, May.
    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. Sadia Tahir, 2006. "Core Inflation Measures for Pakistan," SBP Research Bulletin, State Bank of Pakistan, Research Department, vol. 2, pages 319-342.

    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. Abraham, Katharine G & Katz, Lawrence F, 1986. "Cyclical Unemployment: Sectoral Shifts or Aggregate Disturbances?," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 507-522, June.
    2. Pentti J.K. Kouri & Jorge Braga de Macedo & Albert J. Viscio, 1982. "Profitability, Employment and Structural Adjustment in France," NBER Working Papers 1005, National Bureau of Economic Research, Inc.
    3. Scheide, Joachim, 1989. "On real and monetary explanations of business cycles in West Germany," Kiel Working Papers 356, Kiel Institute for the World Economy (IfW Kiel).
    4. Arthur J. Rolnick & Warren E. Weber, 1994. "Inflation, money, and output under alternative monetary standards," Staff Report 175, Federal Reserve Bank of Minneapolis.
    5. Arthur J. Rolnick & Warren E. Weber, 1998. "Money, inflation, and output under fiat and commodity standards," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 22(Spr), pages 11-17.
    6. Raza, Syed Ali & Shahbaz, Muhammad & Amir-ud-Din, Rafi & Sbia, Rashid & Shah, Nida, 2018. "Testing for wavelet based time-frequency relationship between oil prices and US economic activity," Energy, Elsevier, vol. 154(C), pages 571-580.
    7. Michael Lechner & Friedhelm Pfeiffer & Gert Wagner, 1991. "Die Arbeitsmarkterwartung in der DDR kurz vor der Währungsunion," Discussion Papers of DIW Berlin 22, DIW Berlin, German Institute for Economic Research.
    8. Bruce Smith, 1988. "The relationship between money and prices: some historical evidence reconsidered," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 12(Sum), pages 18-32.
    9. Mosayeb PAHLAVANI & Mohammad RAHIMI, 2009. "Sources of Inflation in Iran: An application of the ARDL Approach," International Journal of Applied Econometrics and Quantitative Studies, Euro-American Association of Economic Development, vol. 9(1).
    10. Behmiri, Niaz Bashiri & Pires Manso, José Ramos, 2014. "The linkage between crude oil consumption and economic growth in Latin America: The panel framework investigations for multiple regions," Energy, Elsevier, vol. 72(C), pages 233-241.
    11. Marini, G., 1989. "Monetary Shocks And The Nominal Interest Rate," Papers 8938, Tilburg - Center for Economic Research.
    12. Goohoon Kwon & Lavern McFarlane & Wayne Robinson, 2009. "Public Debt, Money Supply, and Inflation: A Cross-Country Study," IMF Staff Papers, Palgrave Macmillan, vol. 56(3), pages 476-515, August.
    13. Francisco Rosende R., 2004. "El marco teórico de la política monetaria," Revista de Analisis Economico – Economic Analysis Review, Universidad Alberto Hurtado/School of Economics and Business, vol. 19(2), pages 85-117, December.
    14. McCallum, Bennett T & Nelson, Edward, 1999. "An Optimizing IS-LM Specification for Monetary Policy and Business Cycle Analysis," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(3), pages 296-316, August.
    15. M. Aynul Hasan & Ashfaque H. Khan & Hafiz A. Pasha & M. Ajaz Rasheed, 1995. "What Explains the Current High Rate of Inflation in Pakistan?," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 34(4), pages 927-943.
    16. Lothian, James R. & McCarthy, Cornelia H., 2009. "The behavior of money and other economic variables: Two natural experiments," Journal of International Money and Finance, Elsevier, vol. 28(7), pages 1204-1220, November.
    17. John Leventakis, 1980. "A monetary interpretation of inflation : The Greek case," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 116(3), pages 551-559, September.
    18. Bilal Raza & Khurram S Mughal, 2022. "Fiscal Determinants of Inflation in Pakistan," SBP Working Paper Series 108, State Bank of Pakistan, Research Department.
    19. Barens Ingo & Caspari Volker, 1992. "Ist die Liquiditätsfalle instabil?: Ein Kommentar zur Interpretation des IS-LM-Systems durch Größl-Gschwendtner," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 210(3-4), pages 339-345, May.
    20. Kenny S, Victoria, 2019. "The effect of real shocks on business cycle fluctuations. A Bayesian panel vector autoregressive approach," MPRA Paper 95716, University Library of Munich, Germany.

    More about this item

    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:pid:journl:v:35:y:1996:i:4:p:761-771. 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: Khurram Iqbal (email available below). General contact details of provider: https://edirc.repec.org/data/pideipk.html .

    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.