IDEAS home Printed from https://ideas.repec.org/p/sbp/wpaper/108.html
   My bibliography  Save this paper

Fiscal Determinants of Inflation in Pakistan

Author

Listed:
  • Bilal Raza

    (State Bank of Pakistan)

  • Khurram S Mughal

    (State Bank of Pakistan)

Abstract

This study explores relevance of Fiscal Theory of Price Level for Pakistan, which postulates that fiscal variables also play a role in determining inflation. We have used Autoregressive Distributive Lag model over the period of FY2000Q1-to-FY2019Q3. Unlike most of the previous studies that used only aggregate measure of fiscal deficit, we also have tested for disaggregated fiscal variables on the revenue side. The article finds inflation in Pakistan is a multidimensional process; and fiscal variables along with monetary and supply side factors contribute significantly towards inflation. In particular, we find that different variations of disaggregated fiscal variables like total tax, indirect tax and sales tax are important determinants of inflation.

Suggested Citation

  • Bilal Raza & Khurram S Mughal, 2022. "Fiscal Determinants of Inflation in Pakistan," SBP Working Paper Series 108, State Bank of Pakistan, Research Department.
    • Handle: RePEc:sbp:wpaper:108
    as

    Download full text from publisher

    File URL: https://www.sbp.org.pk/publications/wpapers/2022/wp108.pdf
    File Function: First version, 2022
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Pekarski, Sergey, 2011. "Budget deficits and inflation feedback," Structural Change and Economic Dynamics, Elsevier, vol. 22(1), pages 1-11, February.
    2. John H. Cochrane, 1999. "A Frictionless View of US Inflation," NBER Chapters, in: NBER Macroeconomics Annual 1998, volume 13, pages 323-421, National Bureau of Economic Research, Inc.
    3. Stanley Fischer & Ratna Sahay & Carlos A. Végh, 2002. "Modern Hyper- and High Inflations," Journal of Economic Literature, American Economic Association, vol. 40(3), pages 837-880, September.
    4. McCallum, Bennett T., 2001. "Indeterminacy, bubbles, and the fiscal theory of price level determination," Journal of Monetary Economics, Elsevier, vol. 47(1), pages 19-30, February.
    5. Ilker Domaç & Eray M. Yücel, 2005. "What Triggers Inflation in Emerging Market Economies?," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 141(1), pages 141-164, April.
    6. Catao, Luis A.V. & Terrones, Marco E., 2005. "Fiscal deficits and inflation," Journal of Monetary Economics, Elsevier, vol. 52(3), pages 529-554, April.
    7. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
    8. Milton Friedman, 1971. "A Theoretical Framework for Monetary Analysis," NBER Books, National Bureau of Economic Research, Inc, number frie71-1.
    9. Lin, Hsin-Yi & Chu, Hao-Pang, 2013. "Are fiscal deficits inflationary?," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 214-233.
    10. Friedman, Milton, 1971. "A Monetary Theory of Nominal Income," Journal of Political Economy, University of Chicago Press, vol. 79(2), pages 323-337, March-Apr.
    11. Metin, Kivilcim, 1998. "The Relationship between Inflation and the Budget Deficit in Turkey," Journal of Business & Economic Statistics, American Statistical Association, vol. 16(4), pages 412-422, October.
    12. Thomas J. Sargent & Neil Wallace, 1984. "Some Unpleasant Monetarist Arithmetic," Palgrave Macmillan Books, in: Brian Griffiths & Geoffrey E. Wood (ed.), Monetarism in the United Kingdom, pages 15-41, Palgrave Macmillan.
    13. Woodford, Michael, 1995. "Price-level determinacy without control of a monetary aggregate," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 43(1), pages 1-46, December.
    14. 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.
    15. Woodford, Michael, 1994. "Monetary Policy and Price Level Determinacy in a Cash-in-Advance Economy," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 4(3), pages 345-380.
    16. Hamid Hasan, 1999. "Fisher Effect in Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 38(2), pages 153-166.
    17. Dirk Niepelt, 2004. "The Fiscal Myth of the Price Level," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 119(1), pages 277-300.
    18. Nawaz, Muhammad & Iqbal, Muhammad Mazhar & Ali, Amanat & Zaman, Khalid, 2012. "Fiscal Theory of Price Level: A Panel Data Analysis for selected Saarc Countries," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(3), pages 152-170, September.
    19. Sims, Christopher A, 1994. "A Simple Model for Study of the Determination of the Price Level and the Interaction of Monetary and Fiscal Policy," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 4(3), pages 381-399.
    20. Bennett T. Mccallum, 2003. "Is The Fiscal Theory of the Price Level Learnable?," Scottish Journal of Political Economy, Scottish Economic Society, vol. 50(5), pages 634-649, November.
    21. M. Hashem Pesaran & Yongcheol Shin & Richard J. Smith, 2001. "Bounds testing approaches to the analysis of level relationships," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(3), pages 289-326.
    22. King, Robert G. & Plosser, Charles I., 1985. "Money, deficits, and inflation," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 22(1), pages 147-195, January.
    23. Mr. Daniel Leigh & Mr. Marco Rossi, 2002. "Leading Indicators of Growth and Inflation in Turkey," IMF Working Papers 2002/231, International Monetary Fund.
    24. Mr. Tim Callen & Dongkoo Chang, 1999. "Modeling and Forecasting Inflation in India," IMF Working Papers 1999/119, International Monetary Fund.
    25. Khan, Abdul Aleem & Ahmed, Qazi Masood & Hyder, Kalim, 2007. "Determinants oF Recent Inflation in Pakistan," MPRA Paper 16254, University Library of Munich, Germany, revised 2007.
    26. Zafar Hayat & Muhammad Nadim Hanif, 2020. "Assessing the Role of Money versus Interest Rate in Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 59(1), pages 101-114.
    27. Bajo-Rubio, Oscar & Díaz-Roldán, Carmen & Esteve, Vicente, 2009. "Deficit sustainability and inflation in EMU: An analysis from the Fiscal Theory of the Price Level," European Journal of Political Economy, Elsevier, vol. 25(4), pages 525-539, December.
    28. Tao Sun, 2004. "Forecasting Thailand’s Core Inflation," IMF Working Papers 2004/090, International Monetary Fund.
    29. Kandil, Magda, 2005. "Money, interest, and prices: Some international evidence," International Review of Economics & Finance, Elsevier, vol. 14(2), pages 129-147.
    30. Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 39(3), pages 106-135.
    31. Woodford, Michael, 2001. "Fiscal Requirements for Price Stability," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(3), pages 669-728, August.
    32. Banerjee, Anindya & Dolado, Juan J. & Galbraith, John W. & Hendry, David, 1993. "Co-integration, Error Correction, and the Econometric Analysis of Non-Stationary Data," OUP Catalogue, Oxford University Press, number 9780198288107.
    33. Cukierman, Alex & Webb, Steven B & Neyapti, Bilin, 1992. "Measuring the Independence of Central Banks and Its Effect on Policy Outcomes," The World Bank Economic Review, World Bank, vol. 6(3), pages 353-398, September.
    34. Milton Friedman, 1971. "Correspondence of the Monetary Theory of Nominal Income with Experience," NBER Chapters, in: A Theoretical Framework for Monetary Analysis, pages 46-48, National Bureau of Economic Research, Inc.
    35. Jalil, Abdul & Tariq, Rabbia & Bibi, Nazia, 2014. "Fiscal deficit and inflation: New evidences from Pakistan using a bounds testing approach," Economic Modelling, Elsevier, vol. 37(C), pages 120-126.
    36. Kose, Nezir & Emirmahmutoglu, Furkan & Aksoy, Sezgin, 2012. "The interest rate–inflation relationship under an inflation targeting regime: The case of Turkey," Journal of Asian Economics, Elsevier, vol. 23(4), pages 476-485.
    37. Milton Friedman, 1971. "Some Dynamic Implications of the Monetary Theory of Nominal Income," NBER Chapters, in: A Theoretical Framework for Monetary Analysis, pages 40-43, National Bureau of Economic Research, Inc.
    38. Mr. Stanley Fischer & Ms. Ratna Sahay & Mr. Carlos A. Végh Gramont, 2002. "Modern Hyper- and High Inflations," IMF Working Papers 2002/197, International Monetary Fund.
    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. Ikram Benheddi & Mohammed Kamel Si, 2023. "The Effects of Fiscal Dominance on Monetary Policies in Algeria Amidst COVID-19," Zagreb International Review of Economics and Business, Sciendo, vol. 26(2), pages 77-96.

    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. Jalil, Abdul & Tariq, Rabbia & Bibi, Nazia, 2014. "Fiscal deficit and inflation: New evidences from Pakistan using a bounds testing approach," Economic Modelling, Elsevier, vol. 37(C), pages 120-126.
    2. Lin, Hsin-Yi & Chu, Hao-Pang, 2013. "Are fiscal deficits inflationary?," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 214-233.
    3. Ismail O. Fasanya & Ayinke Fajobi & Abiodun Adetokunbo, 2021. "Are Fiscal Deficits Inflationary In Nigeria? New Evidence From Bounds Testing To Cointegration With Structural Breaks," Economic Annals, Faculty of Economics and Business, University of Belgrade, vol. 66(228), pages 123-148, January –.
    4. Clement Olalekan Olaniyi, 2020. "Application of Bootstrap Simulation and Asymmetric Causal Approach to Fiscal Deficit-Inflation Nexus," Global Journal of Emerging Market Economies, Emerging Markets Forum, vol. 12(2), pages 123-140, May.
    5. Harashima, Taiji, 2008. "A Microfounded Mechanism of Observed Substantial Inflation Persistence," MPRA Paper 10668, University Library of Munich, Germany.
    6. Taiji Harashima, 2004. "The Ultimate Source of Inflation: A Microfoundation of the Fiscal Theory of the Price Level," Macroeconomics 0409018, University Library of Munich, Germany, revised 30 Mar 2005.
    7. Bennett T. McCallum & Edward Nelson, 2005. "Monetary and Fiscal Theories of the Price Level: The Irreconcilable Differences," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 21(4), pages 565-583, Winter.
    8. Philipp F. M. Baumann & Enzo Rossi & Alexander Volkmann, 2020. "What Drives Inflation and How: Evidence from Additive Mixed Models Selected by cAIC," Papers 2006.06274, arXiv.org, revised Aug 2022.
    9. 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.
    10. Óscar J. Arce, 2005. "Reflections on fiscalist divergent price-paths," Working Papers 0533, Banco de España.
    11. Harashima, Taiji, 2007. "Hyperinflation, disinflation, deflation, etc.: A unified and micro-founded explanation for inflation," MPRA Paper 3836, University Library of Munich, Germany.
    12. Bajo-Rubio, Oscar & Díaz-Roldán, Carmen & Esteve, Vicente, 2009. "Deficit sustainability and inflation in EMU: An analysis from the Fiscal Theory of the Price Level," European Journal of Political Economy, Elsevier, vol. 25(4), pages 525-539, December.
    13. Canzoneri, Matthew & Cumby, Robert & Diba, Behzad, 2010. "The Interaction Between Monetary and Fiscal Policy," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 17, pages 935-999, Elsevier.
    14. Buiter, Willem H. & Sibert, Anne C., 2018. "The fallacy of the fiscal theory of the price level: One last time," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 12, pages 1-56.
    15. Fan, Jingwen & Minford, Patrick, 2009. "Can the Fiscal Theory of the price level explain UK inflation in the 1970s?," Cardiff Economics Working Papers E2009/26, Cardiff University, Cardiff Business School, Economics Section, revised Mar 2011.
    16. Lamia Bazzaoui & Jun Nagayasu, 2021. "Is Inflation Fiscally Determined?," Sustainability, MDPI, vol. 13(20), pages 1-26, October.
    17. Esat Durguti & Nexhat Kryeziu & Emine Gashi, 2020. "How Does the Budget Deficit Affect Inflation Rate-Evidence from Western Balkans," International Journal of Finance & Banking Studies, Center for the Strategic Studies in Business and Finance, vol. 9(1), pages 01-10, January.
    18. Dejene Mamo Bekana, 2016. "What Causes Inflation in a Post Communist Economy? Evidence from Ethiopia," Romanian Economic Journal, Department of International Business and Economics from the Academy of Economic Studies Bucharest, vol. 19(61), pages 3-46, September.
    19. Catao, Luis A.V. & Terrones, Marco E., 2005. "Fiscal deficits and inflation," Journal of Monetary Economics, Elsevier, vol. 52(3), pages 529-554, April.
    20. Maissa Elmrabet & Boulila Ghazi, 2018. "Causality deficit-inflation : wavelet transform," Working Papers hal-01941464, HAL.

    More about this item

    Keywords

    Fiscal; Monetary; Inflation;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

    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:sbp:wpaper:108. 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: Faisal Saleem (email available below). General contact details of provider: https://edirc.repec.org/data/sbpgvpk.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.