Price stability is considered as an important objective of macroeconomic policies in
Pakistan. The consequences of fiscal and monetary policies depend on the
dominance of fiscal and monetary policies. Present study has tried to empirically
examine the relative importance of fiscal and monetary policies in determination
of Inflation in Pakistan during 1973-2009. It analyzes the interactions of debt,
fiscal deficit, money supply and exchange rates with inflation, by applying the
Granger causality, VAR decomposition, and Impulse response models. The
results reveal that in Pakistan both monetary and fiscal policies are playing
significant and equal role in determination of prices. The results further reveal
that increase in money supply; exchange rate, fiscal deficit, and debt increase
inflation.
Keywords: Fiscal Policy, Monetary Policy, Inflation, Pakistani
Economy, VAR,