The Long-run Relationship among Money, Income and the Price Level in Pakistan

Abstract

This paper explores whether a significant long-run relationship exists between money, price level and GDP in the Pakistani economy. We apply time-series econometric techniques to quarterly data for the Pakistan economy for 1972: I to 2003: IV. An important feature of our analysis is the use of tests for unit roots and ARDL and ECM. ARDL has a numerous advantages over the traditional approaches of causality and Cointegration. Certain characteristics of the Pakistani experience suggest that there is a stable long run relationship. Radical changes in monetary policy have significantly affected the movement of the macroeconomy. We find that a long-run relationship exists between money supply (M1), GDP and the CPI.