Fiscal and Monetary Regime Identification for Price Stability in Case of Pakistan's Economy

The study examines the relative importance of fiscal and monetary determinants of inflation for Pakistan during 1960-2011. By analyzing the impulse response functions, the relationship linking liabilities to GDP with surpluses to GDP, verify monetary regime. The study finds that the incident of wealth effects of adjustment in nominal public debt may pass through to prices by escalating inflation variability as predicted by the fiscal theory of price determination. The results do not support the perception that monetary authorities acted consistently with monetary dominant regime in Pakistani case to accommodate the fiscal shocks. A positive shock in inflation leads to the negative response of reserve money growth which is consistent with monetary dominant regime. However discount rate that responds negatively to inflation shock is in line with fiscal dominant regime. The different set of analysis leads to implication that nominal public liabilities, as revealing either in money growth or in nominal public debt, influence price stability in case of Pakistan. The authorities may be following different regimes for different time periods during the 1960-2011.