The Monetarist versus the Neo-Keynesian Views on the Acceleration of Inflation: Some Evidence from South Asian Countries (with Special Emphasis on Pakistan)

Abstract

This paper tests the monetarist versus the neo-Keynesian views on the acceleration of inflation, using annual data for Bangladesh, India, Nepal, Pakistan, and Sri Lanka (mostly) for the period 1961—88, within the framework of the theoretical model of Stein (1978, 1982). The empirical results consistently support the monetarist view that changes in real money balances contribute to an acceleration of inflation. Another important finding is that except for Bangladesh, contrary to the neo-Keynesian view, bond-financed government expenditure does not have an independent significant effect on the acceleration of inflation.