Impact of Government Borrowing from Central Bank vs Commercial Banks on Inflation: Empirical Evidence from Pakistan
In a resource constraint country like Pakistan a budget deficit is compensated by government borrowing and most of this is borrowed from the banking sector, which creates inflation hikes in an economy. In order to analyze this empirically, in this study the impact of ‘Borrowings of government from central bank (SBP)’ and ‘Borrowings of government from commercial banks’ on inflation is accessed. The monthly time series data of Pakistan; from June 1998 to June 2017 is taken. Volatility in both government borrowings is measured by GARCH model. Whereas the long run relationship among these two borrowings and inflation is estimated by ARDL model. Furthermore, the ECM model is also used to estimate their short run relationship. The study runs all these models separately for these two borrowings in order to check their impact on inflation. The empirical result suggests that the both borrowings have its positive impact on inflation and have strong relationship in long run. However the borrowings of government from central bank (SBP) has more impact on inflation rather than the borrowings of government from commercial banks, which hinders the monetary policy makers to keep the inflation at its desirable level. Supervisor:- Dr. Abdul Jalil
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