Dynamic Causal Interactions of Money, Prices, Interest Rate and Output in Pakistan

The present study investigates the dynamic interactions among macroeconomic variables such as money supply, prices, interest rate, exchange rate and output level, using the quarterly data for Pakistan over the period 1972Q1 to 2009Q4. For the empirical analysis the Johansen multivariate cointegration technique, Granger causality test and variance decompositions are employed. The results from the cointegration test indicate that there exits a stable long run equilibrium relationship among the macroeconomic variables of the study. The outcome of causality tests tends to support the non neutrality of money view of the Keynesians and the Monetarists at least in the short run. Furthermore, it is seen that there exists a bi-directional causality between money supply and price level, and interest rate and price level. The findings tend to indicate that money supply, real output, interest rate and exchange rate is Granger causing prices in the short run as well as in the long run.