BUDGET DEFICIT, MONEY SUPPLY AND INFLATION: Testing for Causality

G.M. Sajid and Bushra Riaz*

Pakistan Journal of Applied Economics, 2002, vol. 18, 65-84

Abstract: The relationship between budget deficit, money supply and inflation is not only an important but a controversial issue as well for both academicians and lopicy makers. The objective of the study is to investigate the relationship between budget deficit, money supply and inflation in Pakistan by using the quarterly data from 1971:1 to 2003:4. For this purpose vector error correction techinique is employed. The results of the study show short run causality between budget deficit, money supply (M1 and M2) and inflation. There is unidirectional causality from all measures of inflation (CP1, WP1 and GDP deflator) to budget deficit, and both measures of money supply also cause budget deficit in the short run.

Date: 2002
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