The Inflation-Finance Feedback Loop: A Theoretical Investigation of policy Intermediation's Role in Pakistan's Inflation Dynamics

Abstract

The financial intermediaries play a pivotal role in the transmission mechanism of both fiscal and monetary policy for determining the rate of inflation.  Moreover, in developing economies like Pakistan, fiscal dominance is a norm and tax exemption for certain sectors is a pattern. This study explicitly model to gauge the response of inflation for such situations, incorporating the acknowledged role of intermediaries in the frame of policy coordination by taking into account the risk taking behavior of deposit holders and loan advancing strategies of banking industry.