Catalysts Of Inflation In Pakistan: Twin Deficit Or Money Supply
Catalysts Of Inflation In Pakistan:
Keywords:
Budget deficit, inflation, money supply, Pakistan, current account balance, ARDL, Granger causalityAbstract
This study examines long run and short run impacts of budget deficit, money supply, and current account deficit on inflation in Pakistan using quarterly data from 2002Q1 to 2022Q4 by applying autoregressive distributive lagged (ARDL) estimation and Granger causality test. The results confirm presence of long-term and stable impacts of budget deficit, money supply and current account deficit on inflation through ARDL bounds test. Budget deficit was found to strongly impact inflation in long run but its impact gets weaker in short run. Moreover, current account deficit and money supply are reported to exert little impact on inflation in both short run and long run. Furthermore, budget deficit and money supply were noted as key inflation drivers. It is recommended that fiscal policy should be greatly focused, budget deficit must be narrowed and money supply must be prudently controlled by increasing revenues, diversifying its exports and implementing sustainable economic policies.
References
Adom, P. K. et al., 2015. Analysing inflation dynamics in Ghana. African Development Review, 27(11), pp. 1-13.
Adu, G., 2011. Determinants of inflation in Ghana: An empirical investigation. South African Journal of Economics, 79(3), pp. 251-269.
Al Mutairi, A., Al-Abduljader, S. & Naser, K., 2020. Determinants of inflation in Kuwait. The Journal of Developing Areas, 54(3).
Alawin, M. & Oqaily, M., 2017. Current account balance, inflation and sustainable development in Jordan. Revista Galega de Economia, 26(3).
Ali, A., Jan, F. A. & Khan, S. U., 2015. Relationship between inflation and other macro economic variables in Pakistan. Journal of Management Info, 2(4), pp. 6-15.
Bilgrami, S. R. & Maryam, S. R., 2022. Determinants of inflation in Pakistan, India, Bangladesh and Sri Lanka: A panel data analysis.. Journal of Human Behavior and Societies, 1(1), pp. 1-9.
Dinh, D., 2018. World crude oil prices impact on consumer price index. Advances and Applications, 52(1),
pp. 33-54.
Duodu, E., Baidoo, S. T., Yusif, H. & Frimpong, P. B., 2022. Money supply, budget deficit and inflation dynamics in Ghana: An empirical investigation. Cogent Business & Management, Volume 9, p. 2043810.
Durguti, E. A., 2020. How does the budget deficit
affect inflation rate–Evidence from Western Balkans countries. International Journal of Finance & Banking Studies, 9(1), pp. 1-10.
Emerenini, F. & Eke, C., 2014. The impact of monetary policy rate on inflation in Nigeria. Journal of Economics
and Sustainable Development, 5(281), pp. 146-153.
Gries, T. & Redlin, M., 2020. Trade and Economic Development: Global Causality and development- and openness-related heterogeneity2. International Economics and Economic Policy, 17, Volume 17, pp. 923-944.
Haque, N. U. & Jalil, A., 2020. The cost of disinflation: The sacrifice ratio, s.l.: PIDE Knowledge Brief.
Hussain, M., Awan, R. U. & Abbas, A., 2021. A. Nonlinear Causality between Inflation Uncertainty and Stock Returns: Evidence from Pakistan.. IIIE Journal of Economics and Finance, pp. 74-84.
IMF, 2022. Access to macroeconomic and financial data. [Online]
Available at:
https://data.imf.org/?sk=388dfa60-1d26-4ade-b505-a05 a558d9a42
[Accessed 2023].
Jadoon, A. u. & Guang, Y., 2019. The effect of exchange rate fluctuations on trade balance of Pakistan. International Journal of Economic Sciences, 8(1), pp. 68-80.
Javid, A. Y. & Arif, U., 2014. Fiscal and monetary regime identification for price stability in case of Pakistan's economy. Journal of Economic Cooperation and Development, 35(3), pp. 43-70.
Kumo, W., 2015. “Inflation targeting monetary policy inflation volatility and economic growth in South Africa. African Development Bank Group Working Paper, Volume 216, pp. 1-33.
Lozano-Espitia, I., 2008. Budget deficit, money growth and inflation: evidence from the Colombian case. Borradores de Economía, Volume 537, pp. 1-25.
Mehran, M. & Gholani, A., 2023. Current account
dynamics in Iran: An intertemporal approach. International Journal of Political Economy, 4(1), pp. 273-302.
Nasir, M. A., Lorente, D. B. & Huynh, T. L. D., 2020. Anchoring inflation in xpectations in the face of oil shocks & in the proximity of ZLB: A tale of two targeters. Energy Economics, Volume 86, p. 104662.
Nayab, D.-e. & Siddique, O., 2021. Exchange rate policy must seek undervaluation. The Pakistan Development Review, 60(1), pp. 85-91.
Nguyen, T. T., Phan, T. D. & Tran, N. A., 2022. Impact of fiscal and monetary policy on inflation in Vietnam. Investment Management and Financial Innovations, 19(1), pp. 201-209.
Nyguyen, B., 2015. Effects of fiscal deficit and money M2 supply on inflation: Evidence from selected economies of Asia. Journal of Economics, Finance and Administrative Science, Volume 20, pp. 49-53.
Nyguyen, B., 2015. Effects of fiscal feficit and money M2 supply on inflation: Evidence from selected economies of Asia. Journal of Economics, Finance and Administrative Science, Volume 20, pp. 49-53.
Observatory of Economic Complexity, O., 2021. Crude Petroleum in Pakistan. [Online]
Available at:
https://oec.world/en/profile/bilateral-product/crude-petr oleum/reporter/pak2
[Accessed 2023].
Oqaily, M. A. a. M., 2017. Current account balance, inflation, industry and sustainable development in Jordan. Revista Galega de Economia, pp. 45-56.
Ramu, A. M. R., 2014. Relationship between fiscal deficit and inflation in India: a long term empirical analysis. The Indian Economic Journal, 62(31), pp. 1099-1120.
Rehman, F. U. & Khan, D., 2015. The determinants of food price inflation in Pakistan: An econometric analysis. Advances in Economics and Business, 3(12), pp. 571-576.
Rehman, S. et al., 2021. Relationship between Inflation and Other Macro Economic Variables in Pakistan. Ilkogretim Online, 20(5), pp. 7770-7785.
Saleem, F. et al., 2013. Determinants of inflation in Pakistan. Interdisciplinary Journal of Contemporary Research in Business, 4(9), pp. 245-252.
Sriyana, J., 2019. Inflationary effects of fiscal and monetary policies in Indonesia. Business and Economic Horizons, 14(3), pp. 674-688.
Ujiju, L. & Etale, L., 2016. Macroeconomic analysis of the relationship between monetary policy. International Journal of Business and Management, 4(6), pp. 31-39.
Van, D. D., 2020. Money supply and inflation impact on economic growth. Journal of Financial 2Economic Policy, 12(1), pp. 121-136.
World Bank, T., 2022. World Bank Indicators. [Online] Available at:
https://databank.worldbank.org/source/world-developm ent-indicators#
[Accessed 2023].
World Bank, T., 2022. World Development Indicators. [Online]
Available at:
https://databank.worldbank.org/source/world-developm ent-indicators
[Accessed 2023].
Y?ld?r?m, Y. V. E., 2022. The asymmetric effects of the current account balance on inflation: A NARDL approach for Turkish economy. Ekonomski
vjesnik/Econviews-Review of Contemporary Business, Entrepreneurship and Economic Issues, 35(1), pp. 87-97.
