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An Empirical Analysis of Fiscal Imbalances and Inflation in Pakistan

Author

Listed:
  • Asif Idrees Agha

    (State Bank of Pakistan)

  • Muhammad Saleem Khan

    (State Bank of Pakistan)

Abstract

This paper investigates the long-run relationship between inflation and fiscal indicators in Pakistan using annual data from Fiscal Year (FY) 1973 through FY 2003. The empirical results, using Johansen cointegration analysis, suggest that in the long-run inflation is not only related to fiscal imbalances but also to the sources of financing fiscal deficit, assuming the impact of real GDP and exchange rate as exogenous. In VECM model, inflation has significant error correction coefficients that implicitly conclude that inflation is affected by government’s bank borrowing for budgetary support as well as fiscal deficits. Therefore, in Pakistan, fiscal sector is dominant in explaining price movements.

Suggested Citation

  • Asif Idrees Agha & Muhammad Saleem Khan, 2006. "An Empirical Analysis of Fiscal Imbalances and Inflation in Pakistan," SBP Research Bulletin, State Bank of Pakistan, Research Department, vol. 2, pages 343-362..
    • Handle: RePEc:sbp:journl:17
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    File URL: http://www.sbp.org.pk/research/bulletin/2006/vol2num2/Empirical_Analysis_of_Fiscal_Imbalances_and_Inflation_in_Pakistan.pdf
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    References listed on IDEAS

    as
    1. Zeshan Atique & Mohsin Hasnain Ahmad, 2003. "The Supply and Demand for Exports of Pakistan: The Polynomial Distributed Lag Model (PDL) Approach," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 42(4), pages 961-972.
    2. Khan, Mohsin S & Knight, Malcolm D, 1988. "Import Compression and Export Performance in Developing Countries," The Review of Economics and Statistics, MIT Press, vol. 70(2), pages 315-321, May.
    3. Sajjad Akhtar & Fauzia Malik, 2000. "Pakistan’s Trade Performance vis-à-vis Its Major Trading Partners," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 39(1), pages 37-50.
    4. Minoas Koukouritakis, 2004. "EU Accesssion effects on Trade Flows: The Case of Greece," South-Eastern Europe Journal of Economics, Association of Economic Universities of South and Eastern Europe and the Black Sea Region, vol. 2(2), pages 61-79.
    5. Manuchehr Irandoust & Johan Ericsson, 2004. "Are Imports and Exports Cointegrated? An International Comparison," Metroeconomica, Wiley Blackwell, vol. 55(1), pages 49-64, February.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Sara Rafiq & Liu Hai Yun & Gulzar Ali, 2016. "Forecasting the Trend Analysis of Trade Balance of Pakistan: A Theoretical and Empirical Investigation," International Journal of Academic Research in Business and Social Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Business and Social Sciences, vol. 6(7), pages 188-214, July.

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    More about this item

    Keywords

    Fiscal Imbalances; Bank Borrowing; Inflation; Pakistan;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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