Money Supply, Deficit, and Inflation in Pakistan

Mohammad Aslam Chaudhary, Naved Ahmad

Abstract


Inflation is a burning issue in Pakistan. It is generally felt
that for several years Pakistan has had a double-digit inflation. The
public sector has used a mix of policies to control inflation, and it is
also held responsible for its creation. The consumer price index (CPI)
increased over 11 percent in 1981-82, and over 12 percent in 1990-91.
Similarly, sensitive price index (SPI) increased over 15 percent in
1981-82, and over 12 percent in 1990-91. The GDP deflator was also
double-digit for several years. Inflation not only affects sectoral
allocation and distribution of income but also generates poverty. A
prescription might not be appropriate until the roots of the disease are
carefully investigated, which is the very reason for carrying out this
study. Studies by Hossain (1990) several others concluded that inflation
is a monetary phenomenon in Pakistan, while Bilquees (1988) showed that
structural factors explained the inflationary process in Pakistan. It is
widely disagreed whether money supply is exogenous or endogenous. Vogel
(1974), criticising the monetarist approach, argued that further
research is needed on the determination of money supply. Given this
background, this study is intended to identify the variables leading to
inflation; the nature of money supply, endogenous or exogenous, is also
analysed. Section 2 of the study provides a brief review of the
literature. A model is developed to study the relationship among fiscal
deficit, money supply, and inflation. Section 3 contains a description
of the empirical results. Section 4 provides the conclusion and policy
implications.

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DOI: https://doi.org/10.30541/v34i4IIIpp.945-956

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