Monetary Policy and Inflation: A Regime-wise Assessment of Pakistan’s Economy

Öz

Inflation poses a major global issue, particularly in developing nations like Pakistan. Money growth serves as a crucial indicator of inflation and economic expansion. The State Bank of Pakistan manages monetary policy to stimulate the economy and mitigate economic fluctuations, influencing people’s financial choices. This study aims to assess how monetary policy impacts inflation across different regimes in Pakistan. Three distinct regimes are identified: pre-reforms, post-reforms to post-crisis, and post-structural changes. This helps in evaluating the stability of the money supply-inflation relationship over time. Money is categorised as inside money (time and demand deposits) and outside money (currency in circulation) to assess monetary policy’s relative impact on inflation.

Using co-integration tests and FMOLS on quarterly data from 1982Q1 to 2019Q4, the study explores the relationships among variables, including money supply, exchange rate, adjusted real GDP, and budget deficit. Results show a significant long-term relationship, except for economic growth. FMOLS findings indicate a consistent money supply-inflation relationship across regimes. Private and central banks both influence inflation, with private banks slightly more impactful. The State Bank of Pakistan should prioritise managing private sector autonomy for effective inflation control, as central banks aim to control inflation more than commercial banks.

Anahtar Kelimeler

• Monetary policy
• Regimes • Pakistan
• Inflation
• Inside money
• Outside money
• Cointegration
• FMOLS

Kaynakça

1. Adodo, F. L., Akindutire, O. R., & Ogunyemi, J. K. (2018). Monetary policy and control of inflation in Nigeria. International Journal of Management, IT and Engineering, 8(12), 154-170. google scholar
2. Ahmed, S., & Rogers, J. H. (2000). Inflation and the great ratios: Long term evidence from the US. Journal of Monetary Economics, 45(1), 3-35. google scholar
3. Agha, A. I., & Khan, M. S. (2006). An empirical analysis of fiscal imbalances and inflation in Pakistan. SBP research Bulletin, 2(2), 343-362. google scholar
4. Agha, A. I., Ahmed, N., Mubarik, Y. A., & Shah, H. (2005). Transmission mechanism of monetary policy in Pakistan. SBP-Research Bulletin, 1(1), 1-23. google scholar
5. Amassoma, D., Sunday, K., & Onyedikachi, E. E. (2018). The influence of money supply on inflation in Nigeria. Journal of Economics & Management, 31, 5-23. google scholar
6. Benati, L. (2015). The long-run Phillips curve: A structural VAR investigation. Journal of Monetary Economics, 76, 1–17. google scholar
7. Bildirici, M., & Ersin, Ö. Ö. (2013). Forecasting oil prices: Smooth transition and neural network augmented GARCH family models. Journal of Petroleum Science and Engineering, 109, 230–240. google scholar
8. Blejer, M. M. I., Ize, M. A., Leone, M. A. M., & da Costa Werlang, M. S. R. (Eds.). (2000). Inflation targeting in practice: strategic and operational issues and application to emerging market economies. International Monetary Fund. google scholar

9. Borio, C. (2014). The financial cycle and macroeconomics: What have we learnt?. Journal of banking & finance, 45, 182-198. google scholar
10. Lowe, P., & Borio, C. (2002). Asset prices, financial and monetary stability: exploring the nexus (No. 114). Bank for International Settlements. google scholar
11. Brunner, K., Meltzer, A.H., 1981. Time deposits in the brunner-meltzer model. J. Monet. Econ. 7, 129–140.google scholar
12. Chaudhry, I. S., Ismail, R., Farooq, F., & Murtaza, G. (2015). Monetary policy and its inflationary pressure in Pakistan. Pakistan Economic and Social Review, 251-268. google scholar
13. Chick, V., Dow, S.C., 2002. Monetary policy with endogenous money and liquidity preference: a nondualistic treatment. J. Post Keynes. Econ. 24 (4), 587–607 Summer. google scholar
14. Denbel, F. S., Ayen, Y. W., & Regasa, T. A. (2016). The Relationship between Inflation, Money Supply and Economic Growth in Ethiopia: Co integration and Causality Analysis. International Journal of Scientific and Research Publications, 6(1), 556-565. google scholar
15. Denton, F. T. (1971). Adjustment of monthly or quarterly series to annual totals: An approach based on quadratic minimization. Journal of the American Statistical Association, 66(333), 99–102. google scholar
16. Dornbusch, R. (1996). Commentary: How should central banks reduce inflation? —Conceptual issues. Achieving Price Stability, 93-103. google scholar
17. Dupor, B. (2023). Examining long and variable lags in monetary policy. The Regional Economist. google scholar
18. Fontana, G., (2003). Post keynesian approaches to endogenous money: A time framework explanation. Rev. Polit. Econ. 15 (3), 291–314. doi:10.1080/ 09538250308431. google scholar
19. Friedman, M. (1959). The demand for money: some theoretical and empirical results. Journal of Political economy, 67(4), 327-351. google scholar
20. Friedman, M. (1961). The lag in effect of monetary policy. Journal of Political Economy, 69(5), 447-466. doi:[https://doi.org/10.1086/258537](https://doi.org/10.1086/258537) google scholar
21. Friedman, M. (1968), The role of monetary policy. The American Economic Review, 58(1), 1-17. [suspicious link removed]. google scholar
22. Gatawa, N. M., Abdulgafar, A., & Olarinde, M. O. (2013). Impact of Money Supply and Inflation on Economic Growth in Nigeria. Journal of Economics and Finance, 8(3), 26-37. google scholar
23. Goodhart, C., 2001. The endogeneity of money. In: Arestis, P., Desai, M., Dow, S. (Eds.). In: Money, Macroeconomics and Keynes, Essays in Honour of Victoria Chick, 1. Routledge, London, pp. 14–24. google scholar
24. Goodhart, C., & Hofmann, B. (2008). House prices, money, credit, and the macroeconomy. Oxford review of economic policy, 24(1), 180-205. google scholar
25. Hendry, D. F. (1980). Econometrics: Alchemy or science? Economica, 47(188), 387–406. google scholar
26. Hanif, M. N. (2014). Monetary policy experience of Pakistan. google scholar
27. Hristov, N., Hülsewig, O., & Wollmershäuser, T. (2012). Loan supply shocks during the financial crisis: Evidence for the Euro area. Journal of International Money and Finance, 31(3), 569-592. google scholar
28. Hossain, A. (1990). The Monetarist versus the Neo-Keynesian View on the Acceleration of Inflation: Some Evidence from South Asian Countries. The Pakistan Development Review, 29(1), 19-32. google scholar
29. Janjua, M. Ashraf (2004), “History of State Bank of Pakistan (1988‐2003),” State Bank of Pakistan, Karachigoogle scholar
30. Kaldor, N. (1982), The Scourge of Monetarism (Oxford: Oxford U P). google scholar
31. Kemal, A. (2006). “Is Inflation in Pakistan a Monetary Phenomenon?” Pakistan Development Review, 45: 213–220. google scholar
32. Khan, M. U. H. (2008). Short run effects of an unanticipated change in monetary policy: Interpreting macroeconomic dynamics in Pakistan. State Bank of Pakistan Working Paper, 22, 51-8.google scholar
33. Khan, A. A., Bukhari, S. K. H. and Ahmad, Q. M. (2007), Determinants of Recent Inflation in Pakistan. MPRA paper no. 16254, 1 – 16 Khan, R. E. A., & Gill, A. R. (2010). Determinants of inflation: A case of Pakistan (1970-2007). Journal of economics, 1(1), 45-51. google scholar
34. Khan, A. H., Qasim, M. A., & Ahmad, E. (1996). Inflation in Pakistan revisited [with comments]. The Pakistan Development Review, 35(4), 747-759. google scholar
35. Khan, M. S., & Schimmelpfennig, A. (2006). Inflation in Pakistan: Money or wheat? (IMF Working Paper No. WP/06/60). International Monetary Fund. google scholar
36. Khan, R. E. A., & Hye, Q. M. A. (2013). Financial liberalization and demand for money: A case of Pakistan. The Journal of Developing Areas, 175-198.google scholar
37. King, R. G., & Plosser, C. I. (1982). The behavior of money, credit, and prices in a real business cycle (No. w0853). National Bureau of Economic Research.google scholar
38. King, Robert and Charles Plosser (1985). Money, Deficits, and Inflation. Carnegie Rochester Conference Series on Public Policy, 22, 147-195 google scholar
39. McLeay, M., Radia, A., Thomas, R., 2014a. Money in the modern economy: an introduction. Bank Engl. Q. Bull. Q 1 2014. google scholar
40. McLeay, M., Radia, A., Thomas, R., 2014b. Money creation in the modern economy. Bank Engl. google scholar
41. Q. Bull. Q1 2014. google scholar
42. Mills, D. C. (2007). A model in which outside and inside money are essential. Macroeconomic Dynamics, 11(3), 347-366. google scholar
43. Mirbagherijam, M. (2014). Thresholds Effect of Money Growth on Inflation in Iran. International Journal of Academic Research in Business and Social Sciences, 4(9), 319. google scholar
44. McLeay, M., Radia, A., & Thomas, R. (2014). Money creation in the modern economy. Bank of England Quarterly Bulletin, 54(1), 14–27. google scholar
45. Mohamed, I. A. (2016). The Impacts of Monetary Policies on Inflation Rates in Sudan (1970- 2014). International Journal of Advance Research in Management, Engineering and Technology, 1(1), 7.google scholar
46. Munir, K., & Qayyum, A. (2014). Measuring the effects of monetary policy in Pakistan: a factor-augmented vector autoregressive approach. Empirical Economics, 46(3), 843-864. google scholar
47. Nasim , A. (1995). Determinants of Inflation in Pakistan. Karachi: State Bank of Pakistan Press google scholar
48. Omer, M. and O., F., Saqib (2008) Monetary Targeting in Pakistan: A Skeptical Note. State Bank of Pakistan Working Paper Series No.25. google scholar
49. Pesaran, M. H., Shin, Y., & Smith, R. J. (2000). Structural analysis of vector error correction models with exogenous I(1) variables. Journal of Econometrics, 97(2), 293–343. google scholar
50. Pesaran, M. H., Shin, Y., & Smith, R. J. (2001). Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 16(3), 289–326. google scholar
51. Phillips, P. C. B., & Hansen, B. E. (1990). Statistical inference in instrumental variables regression with I(1) processes. Review of Economic Studies, 57, 99–125.google scholar
52. Qayyum, A. (2006). Money, inflation, and growth in Pakistan. The Pakistan development review, 203-212. Qayyum, A. (2008). Does Monetary Policy Play Effective Role in Controlling Inflation in Pakistan. Pakistan Institute of Development Economics Islamabad, Pakistan. MPRA Paper No. 13080.Online at [http://mpra.ub.uni-muenchen.de/13080/](http://mpra.ub.uni-muenchen.de/13080/) google scholar
53. Ringwald, L., & Zörner, T. O. (2021). The money-inflation nexus revisited (No. 310). WU Vienna University of Economics and Business. google scholar
54. Rochon, L-P., Rossi, S. (2013). Endogenous money: the evolutionary versus revolutionary views. Rev. Keynes. Econ. 1 (2), 210–229 January. google scholar
55. Rua, A. (2012). Money growth and inflation in the euro area: A time‐frequency view. Oxford Bulletin of Economics and Statistics, 74(6), 875-885. google scholar
56. Sargent, T. J., & Wallace, N. (1981). Some unpleasant monetarist arithmetic. Federal reserve bank of minneapolis quarterly review, 5(3), 1-17. google scholar
57. Schularick, M., & Taylor, A. M. (2012). Credit booms gone bust: monetary policy, leverage cycles, and financial crises, 1870–2008. American Economic Review, 102(2), 1029-1061. google scholar
58. Svensson, L. E. (2000). Open-economy inflation targeting. Journal of international economics, 50(1), 155-183. google scholar
59. Tarı, R. (1999). Ekonometry. (2). İstanbul: Umuttepe Yayınevi, 453. google scholar
60. Su, C. W., Fan, J. J., Chang, H. L., & Li, X. L. (2016). Is there causal relationship between money supply growth and inflation in China? Evidence from quantity theory of money. Review of Development Economics, 20(3), 702-719. google scholar
61. Tobin, J. (1978). Monetary policies and the economy: the transmission mechanism. Southern Economic Journal, 421-431. google scholar
62. Tursoy, T., & Mar’i, M. (2020). The nexus between money growth and inflation in Turkey: New evidence from a Wavelet Analysis. google scholar
63. Uddin, M. N., Uddin, M. J., & Ahmmed, M. (2019). Money and inflation nexus in Bangladesh. Asian Economic and Financial Review, 9(6), 702. google scholar