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ECONOMIC LIBERALIZATION AND THE CAUSAL RELATIONS AMONG MONEY, INCOME, AND PRICES: The case of Pakistan

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  • Fazal Husain
  • Abdul Rashid

Abstract

This study re-examines the causal relations between money and the two variables, i.e., income and prices. Using annual data from 1959-60 to 2003-04, examining the stochastic properties or the variables used in the analysis, and taking care of the shifts in the series due to the start or the economic liberalization program in the early 1990s, we investigate the causal relations between real money and real income, nominal money and nominal income, and nominal money and prices. The analysis indicates. in general, the long run relationship between the money, income. and prices. The analysis further suggests a one way causation from income to money in the long run implying that real factors rather than money supply has played a major role in increasing Pakistan's national income. The study fails to find the active role of money in changing income even after taking care of possible shifts in these variables due to economic reforms. As regards the causal relationship between money and prices. the analysis suggests a uni-directional causality from money to prices, implying that monetary expansion increases inflation in Pakistan.

Suggested Citation

  • Fazal Husain & Abdul Rashid, 2002. "ECONOMIC LIBERALIZATION AND THE CAUSAL RELATIONS AMONG MONEY, INCOME, AND PRICES: The case of Pakistan," Pakistan Journal of Applied Economics, Applied Economics Research Centre, vol. 18, pages 103-121.
    • Handle: RePEc:pje:journl:article08iv
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    References listed on IDEAS

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    1. Phillips, P C B, 1987. "Time Series Regression with a Unit Root," Econometrica, Econometric Society, vol. 55(2), pages 277-301, March.
    2. Brillembourg, Arturo & Khan, Mohsin S, 1979. "The Relationship between Money, Income, and Prices: Has Money Mattered Historically? A Note," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(3), pages 358-365, August.
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    6. Phillips, P C B, 1987. "Time Series Regression with a Unit Root," Econometrica, Econometric Society, vol. 55(2), pages 277-301, March.
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    Cited by:

    1. Asma Awan & Hafiz Khalil Ahmad & Altaf Hussain & Muhammad Yousuf Khan Marri, 2021. "Prices, Money Supply and Output Nexus in Pakistan – A Macro Econometric Model," iRASD Journal of Economics, International Research Alliance for Sustainable Development (iRASD), vol. 3(2), pages 38-77, September.

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    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

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