This study investigates the effects of political instability on inflation in Pakistan. Applying the Generalized Method of Moments and using data from 1951-2007, we examine this link in two different models. The results of the 'monetary' model suggest that the effects of monetary determinants are rather marginal and that they depend upon the political environment of Pakistan.The 'nonmonetary' model's findings explicitly establish a positive association between measures of political instability and inflation. This is further confirmed on analyses based on interactive dummies that reveal political instability significantly leading to high (above average) inflation.
JEL Codes:E31, E63
The paper reviews the 1997 East Asian crisis within the framework of the five stages of displacement, boom, overtrading, revulsion, and tranquility of the Kindleberger-Minsky model. It further notes that the recent interpretations of the crisis, based on the hypotheses of fundamental imbalances and financial panic, conform to the stages of the Kindleberger-Minsky model.
The post 9/11 scenario in Pakistan’s economy can readily be
identified with a host of positive developments. Real GDP growth rates
have averaged around 6 percent since 2002, stock market surges have
broken all the previous records, there is much more dynamism in the
banking industry, capital flows are pouring into the economy, foreign
exchange reserves have swelled to record high levels, and poverty has
witnessed a declining trend. However, what mars these celebrations since
last year is the scepticism of some market commentators on the growing
vulnerability of Pakistan’s economy to crisis.1 The main weakness, as
widely pointed out, remains the sustainability of current account
deficit along with rising fiscal imbalances. A review of empirical
literature on the determinants of currency crisis introduces a host of
macroeconomic fundamentals broadly based on the predictions of the
seminal first- and second-generation models. Although the list of these
determinants varies from study to study, the consensus appears to be on
the sustainability of external and fiscal positions as the main
predictors of a crisis. An overview of the Pakistani fundamentals since
2000 reveals that broadly key Pakistani economic indicators do not give
an immediate cause for concern. However, the emergence of primary budget
balance as a deficit and the growing trade and current account deficits
in the last two years does seem to be a cause for concern.
scite is a Brooklyn-based organization that helps researchers better discover and understand research articles through Smart Citations–citations that display the context of the citation and describe whether the article provides supporting or contrasting evidence. scite is used by students and researchers from around the world and is funded in part by the National Science Foundation and the National Institute on Drug Abuse of the National Institutes of Health.