Money, Income, Prices, and Causality: The Pakistani Experience
thought. According to the Keynesians, the role of money in income generation is passive, and changes in money stock are induced by changes in income, not vice versa. In other words, the direction of causation runs from income to money without any feedback. According to the monetarists, money plays an active role in income generation, and changes in income are induced largely by changes in money stock. In other words, the direction of causation runs from money to income without any feedback. As regards the relationship between money and prices, the Keynesian school holds that money is important, but inflation is mainly caused by structural factors, while the monetarist school holds that inflation is purely a monetary phenomenon caused by monetary factors. Resolving the question of temporal causality between monetary and real income variables can provide insights as to how different policies affect income generation. The determination of the direction of causation between money and income and between money and prices is crucial to the adoption of policies aimed at economic growth and development. It is thus not surprising that the issue has been subjected to empirical tests of causality using the standard Granger or Sims procedure in a large number of countries.