An Empirical Analysis of Fiscal Imbalances and Inflation in Pakistan

Asif Idrees Agha () and Muhammad Saleem Khan
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Asif Idrees Agha: State Bank of Pakistan
Muhammad Saleem Khan: State Bank of Pakistan

SBP Research Bulletin, 2006, vol. 2, 343-362.

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.

Keywords: Fiscal Imbalances; Bank Borrowing; Inflation; Pakistan (search for similar items in EconPapers)
JEL-codes: E31 E63 (search for similar items in EconPapers)
Date: 2006
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:sbp:journl:17

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