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Determining inflation as monetary or fiscal phenomenon: An empirical evidence from South Asia

Shahid Obaid (), Mirza Aqeel Baig and Muzafar Ali Shah
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Shahid Obaid: Department of Business Administration, Sindh Madressatul Islam University, Karachi Pakistan.
Mirza Aqeel Baig: Economics Department, Institute of Business Management, Karachi Pakistan.
Muzafar Ali Shah: Department of Business Administration, Sindh Madressatul Islam University, Karachi Pakistan.

BizEcons Quarterly, 2020, vol. 6, 22-48

Abstract: This paper examines the relation between monetary and fiscal indicators with rate of inflation and determine whether monetary or fiscal indicators cause and predict inflation in an economy. In order to determine this relationship, a sample of six South Asian countries are taken in this research i.e. Pakistan, Sri Lanka, Bangladesh, India, Bhutan and Nepal. Five independent variables act as factors of monetary and fiscal policies i.e. money supply, interest rate, exchange rate, government expenditure and budget deficit are included. Twenty-five years (1993-2017) historic data is incorporated to estimate regression and granger causality. Various econometric techniques and statistical tools are used to refine the model. Findings suggest that money supply, interest rate and exchange rate are significant. However, government expenditure and budget deficit reported insignificant. Further, inflation granger causes exchange rate and broad money granger causes inflation. It is extracted from granger causality that inflation predicts exchange rate and money supply predicts the rate of inflation.

Keywords: Monetary policy; Fiscal policy; Inflation (search for similar items in EconPapers)
JEL-codes: A13 F43 O13 (search for similar items in EconPapers)
Date: 2020
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