An Econometric Analysis of Price Behaviour in Pakistan

B. A. Azhar


In this paper an attempt has been made to explore the major
causes of price level changes in West Pakistan during the past thirteen
years and to deter¬mine their relative importance in explaining the
price fluctuations. A supple¬mentary object of the paper is to develop a
predictive mechanism which may be used to forecast the response of price
level to changes in the explanatory variables used in the regression
model. There is vast literature on inflation theory [3] but not so much
on quanti¬tative evidence. Broadly, there are three groups of theories
of inflation: the demand pull theories, which state that inflationary
pressures result from aggregate demand exceeding aggregate supply at
full employment; the cost-push theories, which stress the producers'
power to pass on cost increases in higher prices even when demand
remains unchanged. The third group of theories, which take a mid-way
position between the demand-pull and the cost-push theories, are a
number of structural theories, notably those associated with the names
of Ackley, Eckstein, and Schultze [1,5,11]. According to Ackley,
inflation results from mark-up of prices. He considers the price
policies of the firms and the wage policies of the labour unions to be
responsible for inflation. He puts forward the hypothesis that mark ups
used by business in setting prices and those applied by the labour
unions to their cost of living for getting higher wages tend to rise in
an inflationary situation which results in pyramiding of costs.
Professor Otto Eckstein advances the hypothesis that inflation may be
caused by price increases in certain bottleneck industries even when
there is no over-all excess demand in the economy.

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