| Abstract: |
This paper examines the causal relationship among composite indicators for
real, monetary/financial, social and infrastructure development in Pakistan.
This is an effort to provide evidence on the two highly debatable issues, i.e.
money-real causality and social-economic causality in a single multivariate
framework. We use a large number of variables to construct the composite
indicators of development in four major sectors of the economy: social
development, real economic development, monetary and financial growth and
infrastructure development. The data are collected from 1971-72 to 2003-04 on
annual basis. The technique of factor analysis using principal component is
employed to construct these indicators. The computed values of these
indicators over the aforementioned time span constitute time series data.
Using these time series data the paper assesses that a long-run relationship
exists among social, real, monetary and infrastructure activities. The paper
has applied Granger Causality test in a Vector Error Correction model and
concludes that social development is caused by real economic development but
not vice versa, which is indicative of ‘trickle-down’ development policies. It
also concludes that in the context of Pakistan, no causal relationship exists
between real economic development and monetary growth; meaning that monetary
development has no impact on the economic growth of the country. However, both
real development and monetary indicators appear to be exogenous in the system
which implies that these can be used as instrument in developing social and
physical infrastructure to boost investment and improving the quality of life
of the people. |