Producer & Consumer Prices Nexus: ARDL Bounds Testing Approach

The present endeavor explores relationship between producer and consumer price indices by employing new techniques. We have utilized the time series monthly (1992M1-2007M6) data while ARDL Bounds Testing and Johanson Cointegration Approach is used to determine the long run association and robustness of long run results. Toda & Yamamato (1995) and Variance Decomposition for causal rapport between producer and consumer prices are applied. DF-GLS & Ng-Perron Tests are also applied to inquire the order of integration for running variables. Results have verified the existence of long run relationship between producer and consumer prices, and their association is robust in long span of time in the case of small developing economy like Pakistan. Causal results through Toda and Yamamato’s (1995) technique asserts that there is two-way causality but it is stronger from producer to consumer prices and same with Variance Decomposition Method. Finally Feed back impacts show that feedback influence from PPI to CPI is stronger or dominating as compared to feedback from CPI to PPI, which support “Cushing and McGarvey (1990) hypothesis”