MONEY-INCOME-PRICE NEXUS IN PAKISTAN: Explaining the Role of Black Money

Abdul RASHID* and Abdul MANSOOR**

The main objective of this study is to examine the short-run and long-run causality between money, income, and prices in Pakistan by taking into account the black economy which is the hidden part of total economic activities. The Autoregressive Distributed Lag (ARDL) model is applied on annual data covering the period 1980 to 2012 to examine the level relationship (cointegration) between the underlying variables. The study finds that there is a significant level relationship between variables for both the price and income equations; whereas, no significant evidence of the existence of level relationship is found in the money-supply equation. The short-run causality analysis provide evidence of bi-directional causality between money supply and income. Results of the study suggest that although the view of both Monetarists and the Keynesian holds in short-run, and in the long-run, but only the Monetarists’ view holds in Pakistan. This piece of evidence would be particular interest to policy-makers.