AN ANALYSIS OF MACROECONOMIC LINKAGES: THE CASE OF PAKISTAN

The controversy over the likely linkages among money supply, prices, economic growth and exchange rate is well debated in the literature. Yet the subject remains open for further examination. This paper attempts to explore this linkage in the long run as well as in the short run for the economy of Pakistan. Co-integration and error correction techniques on quarterly data are employed for this purpose. Although a number of attempts have been made to investigate the linkages among money supply, prices, economic growth and exchange rate in Pakistan, the use of high frequency data in these analyses is missing. The data on all variables except output growth are taken from IFS CD-ROM. Kemal Arby (2004) series of quarterly GDP is used for output growth. The results show the existence of two co-integrating equations among the four variables; a two-way causality has been found between money and output and one-way causality between all other pairs of the variables.