Inflation and Economic Growth in Pakistan (An Econometric Approach)

Author(s) : Dr. Mazhar-ul-Haq Baluch

Abstract:

This study has been conducted to assess the bi-directional relationship of economic growth and inflation so that beyond theoretical concept inflation could be treated for policy implication. Time Series data pertaining to 1971 to 2005 for analysis purposes was applied to estimate the objective oriented results. Both the series were found to be stationary at first difference for all the considered period on the basis of ADF test and Phillip Parron test. The estimated Error Correction Model (ECM) has shown no exact relationship in the short as well as in the long run. Undoubtedly the three periodical segments showed different pattern of relationship because of independency of relationship under every considered segment of time beyond theory and concept. So there existed a positive shock to the system which resulted in adjustment in opposite direction. These results were supporting the idea that the system revealed no relationship between inflation and economic growth under the environment created by the economic, social and political policies of the country. The optimal inflation rate for Pakistan under the introduced economic environment was 8 percent or 9 percent which would be positively contributing to economic growth.