Political instability and inflation in Pakistan

This study investigates the effects of political instability on inflation in Pakistan. Applying the Generalized Method of Moments technique and using data from 1951 to 2007, we examine this link through two different models. The results of the 'monetary' model suggest that the effects of monetary determinants are rather marginal and that they depend upon the political environment of Pakistan. The 'nonmonetary' model's findings explicitly establish a positive association between political instability and inflation. This is further confirmed through analysis based on interactive dummies that reveal political instability significantly leading to high (above average) inflation.

► We investigate the political instability-inflation nexus in Pakistan. ► Hypothesis is examined in two monetary and non-monetary models, using GMM technique. ► Results suggest political environment as the most important determinant of inflation. ► Further analysis show Political instability also leading to high (above average) inflation.