1 / 14

Is Inflation a fiscal phenomenon in Pakistan? By Hamna Ahmed Department of Economics, University of Warwick.

Is Inflation a fiscal phenomenon in Pakistan? By Hamna Ahmed Department of Economics, University of Warwick. To answer this question we will be looking at the following variables: Fiscal deficits D = G – t Seiniorage S = M – M (-1) /P Price level. Motivation.

Ava
Download Presentation

Is Inflation a fiscal phenomenon in Pakistan? By Hamna Ahmed Department of Economics, University of Warwick.

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Is Inflation a fiscal phenomenon in Pakistan?ByHamna AhmedDepartment of Economics,University of Warwick.

  2. To answer this question we will be looking at the following variables: • Fiscal deficits D =G – t • Seiniorage S = M – M(-1)/P • Price level

  3. Motivation • Inflation in Pakistan: Persistent Ever-increasing A serious challenge

  4. Objective A simple model has been designed to assess: • Direct Impact of d on p:  d   aggregate demand  p • Indirect Impact of d on p:  d  s by printing money   p

  5. A Step-wise Approach • Step I A preliminary model – any meaningful long-run relationship between deficit & seiniorage? • Step II The final model – all three variables tested jointly.

  6. Fiscal Deficits Seigniorage Inflation Direct & Indirect Impact illustrated Channel 1  direct Channel 2 to 3  indirect 1 2 3

  7. Methodology • Johansen approach to co-integration analysis • Interested in long-run dynamics only because…. • Data– annual time series, Sample period: 1956 – 2005, Source: IFS repository.

  8. Model Specification • Model Specification – log-linear p = α + β* d + γ*s + µ where: p = ln(P) d = ln(G - t ) s = ln(Ṁ/P) = ln(Ṁ) – ln(P) β= elasticity of p w.r.t deficits γ = elasticity of p w.r.t. seigniorage

  9. Preliminary Model – Estimation • The following VAR modeled to discern a long-run relationship between deficit and seigniorage: y(t) = μ + ∏(1)y(t-1) + ∏(2) y(t-2) + ℮(t) where y(t)′ = (y(1t), y(2t)) y(1t) = seiniorage y(2t) = deficit ℮ (t) ′ = (℮(1t), ℮(2t)

  10. Preliminary Model – Results • Johansen approach yields a stable long-run relationship between deficit and seiniorage given by: s = 0.447d + residual (C1) • To finance a 1% increase in fiscal deficit in the long run, seigniorage would increase by 0.447% on average, ceteris paribus.

  11. The Final Model – Results • Again a VAR estimated • The Johansen procedure yields a stable long-run relationship at 5% level of significance: p = 0.0349d + 1.1535s + residual(C2) • A 1% increase in deficit increases expected inflation by 0.0349% ceteris paribus. • A 1% increase in seigniorage increases expected inflation by 1.1535% ceteris paribus.

  12. Summary & Findings • In Pakistan, inflation is highly elastic to monetary expansion: a 1%  in seiniorage (money creation) 1.15% price hike, ceteris paribus. • Direct impact of d on p: a 1%in deficits  0.0349% in expected inflation, ceteris paribus. • Indirect impact of d on p: a 1%in deficits  0.447%  in seiniorage 0.516% price hike, ceteris paribus.

  13. Policy Implication FISCAL ADJUSTMENT IS NECESSARY FOR UNDERTAKING A PRICE STABILIZATION POLICY IN PAKISTAN

  14. Conclusion • Apparent cause of inflation may be monetary but true dynamics of macro-economic instability go deeper - persistence of fiscal deficit financed largely if not entirely by seiniorage. • Effective stabilization policy must be designed in accordance.

More Related