Do Money Or Oil And Crop Productivity Shocks Lead To Inflation: The Case Of Pakistan

Syed, Kanwar Abbas (2009): Do Money Or Oil And Crop Productivity Shocks Lead To Inflation: The Case Of Pakistan.

Abstract

The worst economic outcomes have been argued as a result of the mismanagement in money supply especially in 1929’s Great Depression, 1970’s Stagflation and 2008’s Economic depression in the global economy. However, economic recessions tend to appear after oil price phenomenon. In particular, the global inflationary pressures of 2008 became severe with the spikes up in oil prices as well as crop productivity shocks in the world economy including Pakistan. The object of the present paper is to discuss inflation in the framework of Monetary and external Oil Price Shocks, Crop Productivity Propositions, Inflation Inertia, and real GDP growth. The empirical studies broadly uphold the monetary explanation of inflation in the Pakistan’s economy. This paper offers the policy implication that the combination of monetary as well as productivity management is required to arrest inflationary pressures in the economy. In addition, we find the comprehensive evidence that food inflation is also a monetary phenomenon in the Pakistan’s economy. On the other hand, the continuous persistence in inflation inertia does not hold as a result of the absence of autocorrelation in money supply in AR (2) or higher process in the data. Oil prices in terms of domestic currency highlight the fact that the transmission channel of world shocks via exchange rate fluctuations leaves significant impacts upon domestic inflation in the economy.

• Item Type: MPRA Paper
• Language: English
• Keywords: Money; Inflation; Oil; Productivity
• Subjects: B - History of Economic Thought, Methodology, and Heterodox Approaches > B2 - History of Economic Thought since 1925 > B22 - Macroeconomics

References

1. Abbas, Syed Kanwar. (2008), “Global Food Crisis & Inflationary Pressures: Short and Medium to Long Term Policy Options”, MPRA Paper No. 9981. University Library of Munich, Germany.

2. Ball, Laurence (2000). “Near-Rationality and Inflation in Two Monetary Regimes”, NBER Working Papers No. 7988.

3. Barsky, Robert B., and Kilian Lutz. (2001). “Do We Know That Oil Caused the Great Stagflation? A Monetary Alternative”, NBER Working Paper No. 8389.

4. Bilques, Faiz (1988), “Inflation in Pakistan: Empirical Evidence on the Monetarist and Structuralist Hypothesis”, The Pakistan Development Review, 27:2, PP. 109-130.

5. Blanchard and Gali. (2007), “The Macroeconomic Effects of Oil Price Shocks: Why are the 2000S So Different From the 1970S?”, NBER Working Paper No. 13368

6. Browne, Frank and Cronin, David. (2007), “Commodity Prices, Money and Inflation”, European Central Bank, Working Paper No. 738.

7. Buncic, Daniel. and Melecky, Martin. (2008). “An Estimated New Keynesian Policy Model for Australia”, The Economic Record, Vol. 84, No. 264.

8. Christiano, Lawrence. Eichenbaum Martin and Evans, Charles. (1998), “Monetary Policy Shocks: What Have We Learned And To What End?”, NBER Working Paper No. 6400. 9. Cunado, Juncal. and Fernando, Perez De Gracia. (2004), “Oil Prices, Economic Activity and Inflation: Evidence for Some Asian Countries”, Universidad De Navarra, Working Paper No.06/04.

10. Friedman and Schwartz. (1963), “A Monetary History of the United States”. Princeton University.

11. Hamilton, James D. (2005), “Oil and the Macroeconomy”, mimeo, prepared for the Palgrave Dictionary of Economics.

12. Hossain, Akhtar. (1990), “The Monetarist versus the Neo-Keynesian View on the Acceleration of Inflation: Some Evidences from South Asian Countries”, The Pakistan Development Review, 2:1, PP.19-32.

13. Husain, Fazal and Abbas, Kalbe. (2000), “Money, Income, Prices, and Causality in Pakistan: A Trivariate Analysis”, Pakistan Institute of Development Economics, Research Report No. 178.

14. Kemal, Ali. (2006), “Is Inflation in Pakistan a Monetary Phenomenon?”, The Pakistan Development Review, 45 : 2. PP. 213-220.

15. Khan. Ashfaque H,. and Qasim, Mohammad Ali. (1996), “Inflation in Pakistan Revisited”, The Pakistan Development Review, 35:4, PP. 747-759.

16. Khan, Mohsan and Schimmelpfenning. (2006), “Inflation in Pakistan”, The Pakistan Development Review, 45: 2, PP. 185–202.

17. Mankiew, Gregory. and Reise, Ricardo. (2001), “Sticky Information Versus Sticky Prices: A Proposal to Replace The New Keynesian Phillips Curve”, NBER Working Paper No: 8290.

18. Manzoor Hussain. (2006). “Money and Prices: Empirical Evidence of Their Relationship in Pakistan”, Pakistan Business Review, April Issue.

19. Naqvi, S.N., Ashfaque H. Khan, A.M. Ahmed and Rehana Siddiqui. (1994), “Inflation in Pakistan: Causes and Remedies”, Islamabad: Pakistan Institute of Development Economics.

20. Nasim, Anjum. (1995), “Determinants of Inflation in Pakistan”, Karachi: State Bank of Pakistan.

21. Nicoletta, Batini. and Edward, Nelson. (2002), “The Lag From Monetary Policy Actions to Inflation: Friedman Revisited”, Bank of England, Discussion Paper No. 6, 22. Olafsson, Thorvardur Tjorvi. (2006), “The New Keynesian Phillips Curve: IN Search of Improvements and Adaptation to the Open Economy”, Central Bank of Iceland, Working Paper No.31.

23. Pakistan, Government of (Various Issues) Economic Survey. Ministry of Finance.

24. Pakistan, Government of. Agricultural Statistics of Pakistan 2006-2007, Ministry of Food, Agriculture & Livestock.

25. Qayyum, Abdul. (2006). “Money, Inflation, and Growth in Pakistan”, The Pakistan Development Review, 45: 2, PP. 203–212.

26. State Bank of Pakistan. Annual Report, 2007-2008.

27. Stiglitz, Joseph E. (May, 2008), “The Failure of Inflation Targeting”, Available at http://www.project-syndicate.org/commentary/stiglitz99

28. Taylor. John B. (2009). “The Financial Crisis and The Policy Responses: An Empirical Analysis of What Went Wrong”, NBER Working Paper No: 14631.