ISSN: 1998 - 4162

JISR MSSE Journal Contents

Volume 10, Number 2, July 2012


Role of Demand and Supply Shocks in Driving Inflation: Case Study of Pakistan
Mahmood ul Hasan Khan - State Bank of Pakistan, Karachi, Pakistan
Dr. M. Nadeem Hanif - State Bank of Pakistan, Karachi, Pakistan


Abstract
Generally, inflation refers to a reduction in purchasing power per unit of money and is considered a consequence of negative trends in monetary activity. As a number of factors may lead to inflation in an economy, this study attempts to measure the relative significance of structural shocks in explaining inflation. Monthly time series data is used on key macroeconomic variables of Pakistan from July 1992 to June 2011, and structural vector auto-regressions (SVAR) to understand the role of supply and demand shocks as key drivers of inflation. Long-run restrictions according to standard aggregate demand and aggregate supply framework are employed to identify structural shocks in the system. The results indicate that inflation follows a sluggish time path in response to supply shock as compared to demand shock of nominal nature. Specifically, around 75 percent of long-run impact of supply shock on inflation...

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