Determinants of Recent Inflation in Pakistan and its Relation with Economic Growth: An Econometric Analysis

Abstract

Price stability issue is very important for any economy. Inflation affects everyone in society. The main concern of macroeconomic policies is optimum and stable economic growth along with low inflation. Current CPI inflation in Pakistan is recorded at 11.0 percent on a year-on-year basis in April 2021. Inflation adversely impacts the overall growth of the economy. This study explored the effect of money supply, GDP, oil prices, and exchange rate on the rate of inflation in Pakistan. The sample period of study ranges from the year 1989 to 2019. Annual data in percentage was used for s time series analysis. Results of the ADF test for stationarity proposed that CPI, GDP, and ER were non-stationary at first difference while M2 and OP were stationary. Results of ARDL projected that ER of lag 2, GDP of lags 2 and 4, and M2 of lag 2 were significant. The coefficient of ER was -0.471 at lag 2, the coefficient of GDP was -1.163 at lag 2 and 0.966 at lag 4, and the coefficient of M2 was 0.473 at lag 2. The bounds test revealed that the relationship among these variables was longer-term. In long run the effect of ER was negative and the impact of M2 on CPI was positive. Short-run results suggested that ER at one lag impact was positive. The impact of GDP at lag one was positive and negative at lag three. The M2 impact was negative at a lag of one year.