Original scientific paper
An Analysis of Relationship between Remittances and Inflation in Pakistan
Anum Nisar
; Department of Economics, Fatima Jinnah Women UniversityRawalpindi, Pakistan,
Saira Tufail
Abstract
Remittances play a signifi cant role in the economic development of recipient economy
through different micro and macroeconomic channels. However, the adverse impact of
remittances in the form of Dutch disease and infl ation cannot be overlooked. This study
aims to examine the impact of remittance on infl ation and its different categories, namely,
food infl ation, footwear and textile infl ation, housing and construction infl ation. Accordingly,
four vectors have been formulized to capture the determinants of overall infl ation
and its different categories with particular focus on remittances. The study employed Johansen
(1990) and Johansen & Juselius (1990) cointegration technique to check the existence
of long run relationship between remittances and infl ation. Vector Error Correction
technique is further applied to examine the extent and direction of relationship between
variables and to check the stability of models. The results indicated the existence of one
cointegrated vector for all equations. Moreover, remittances, money supply and real per
capita income are found to have positive impact on infl ation and its different categories.
The results revealed that among different infl ation categories food infl ation is most effected
and housing & construction infl ation is least effected by remittances. Budget defi cit is signifi
cant in reducing foot wear and textile infl ation only. On the other hand trade openness
is effective in reducing all types of infl ation by same magnitude and strength. Given the
infl ationary nature of remittances it becomes necessary for government o channelize the
remitted funds into productive investment to avoid surge in demand pull infl ation.
Keywords
remittances; Inflation; cointegration; VECM
Hrčak ID:
110094
URI
Publication date:
1.11.2013.
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