Money, Income, Prices, and Causality: The Pakistani Experience

The role of monetary policy in economic growth, or more specifically the relationship between money and income and between money and prices, has long been a subject of debate between the Keynesian and the monetarist schools of thought. According to the Keynesians, the role of money on income generation is passive, and changes in money stock are induced by changes in income, not vice versa. As regards the relationship between money and price, the Keynesian school holds that money is important, but inflation is mainly caused by structural factors, while the monetarist school holds that inflation is purely a monetary phenomenon caused by monetary factors. Resolving the question is temporal causality between monetary and real income variables can provide insights as to how different policies affect income generation.