Determinants of Recent Inflation in Pakistan

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The expansionary economic policies of the government and of the central bank (State Bank of Pakistan – SBP), which on one side resulted in impressive economic performance, stimulated a rise in the Consumer Price Index (CPI) on the other. This initiated a debate on the determinants of the recent inflation. Some blamed fiscal policy or monetary policy, while others blamed imported inflation, administered prices or mismanagement and loose control of the government. This study, adopting an econometric framework, focuses on the identification of the main determinants of recent inflation trends. Using data from the 1972-73 to 2005-06 period, applying ordinary least square method and verifying results through Breusch-Godfrey Serial Correlation LM and Augmented Dickey-Fuller tests, it finds that the most important determinants of inflation in 2005-06 were adaptive expectations, private sector credit and rising import prices. Whereas, the fiscal policy’s contribution to inflation was minimal.