ABSTRACT

This thesis examines how monetary and fiscal policy stances jointly determine the dynamics in growth  of  price  level  in  Pakistan.  Employing  a  five-variable Vector Autoregression  (VAR) augmented with a Markov-Switching Regime model, the analysis covers quarterly data from 1991Q1 to 2023Q4 and includes a dummy capturing periods of monetary fiscal coordination. The VAR traces the spillover effects of debt growth, interest rates, output, and policy shocks on inflation. The results indicate that fiscal policy shocks, especially debt-financed deficits under a non-Ricardian regime, generate sustained inflationary pressure. In contrast, contractionary monetary shocks often produce a short-run “price puzzle” (inflation temporarily rises) and, under fiscal dominance, have little long-run impact on inflation variance. Crucially, the empirical evidence shows that independent interest rate hikes are ineffective unless backed by fiscal discipline. Only when monetary tightening is accompanied by credible fiscal consolidation does inflation slow down significantly.