A Significant Shift in Causal Relations of Money, Income, and Prices in Pakistan: The Price Hikes in the Early 1970s

This study extends the analysis of causality by Husain and Rashid (2006) by taking care of the shift in the variables due to the price hikes in the early 1970s. We investigate the causal relations between real money and real income, between nominal money and nominal income, and between nominal money and prices using the annual data set from 1959-60 to 2003-04, examining the stochastic properties of the variables used in the analysis and taking care of the expected shifts in the series through dummy/ies. The analysis indicates significant shifts in the variables during the sample period. In this context, the shift of the early 1970s seems to be more important to be incorporated in the analysis. The study finds an active role of money in the Pakistani economy, as it is found to be the leading variable in changing prices without any feedback. In the case of income, the study finds the feedback mechanism of money, which is generally missing in the earlier studies probably because of not taking care of the shift in the macroeconomic variables in Pakistan in the early 1970s.