Abstract
The purpose of this study is to determine the
empirical relationship between budget deficits and
inflation based on CPI, and to find empirical evidence of
sources of inflation in Pakistan, considering data from
1973 to 2006. The main source of data has been the State
Bank of Pakistan and the Federal Bureau of Statistics.
Univariate analysis along with simple statistical analysis
is utilized to determine the time series properties of each
variable. Ordinary Least Square (OLS) method is used to
analyze the relationship between the variables of Interest.
Co-integration and Error Correction Mechanism (ECM)
are used to determine the long run and short run
relationships respectively.
The results of this study indicate that there is a long run
relationship between inflation and Budget Deficit to GDP
Ratio (BDGR). Further sources of inflation in Pakistan
have been budget deficits, GDP growth, and international
inflation, reserve Money and weighted average lending
rates. The implications are that tight monetary policy can
serve as an effective anti-inflationary measure but a
restrictive fiscal policy (reduction in government
expenditures) can also help to minimize inflation in
Pakistan.
Riaz H. Soomro, Asif Saeed Memon. (2008) Empirical Study of Relationship between Budget Deficits and Inflation: A Case Study of Pakistan , Journal of Independent Studies and Research-Management, Social Sciences and Economics, Volume-06, Issue-1.
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