Investigating the Relationship between Inflation and Economic Growth: A Case of Pakistan

Abstract

We re-evaluate empirically the relationship in inflation, and economic growth for Pakistan over the period of 1985 to 2019. Using the Autoregressive Distributive Lag (ARDL) method, this study used the Wald and F-Bound test to find out long-term relationships between these variables and investigate the effect of Inflation over Pakistan economic growth and trade. Our result indicates inflation is negatively affecting economic growth and terms of trade in long run. The results showed that a moderate level of inflation is beneficial for growth and trade while high level or double-digit figure inflation harmful for Pakistan economy. According to the results of the study, inflation is away from its equilibrium value. Error correction term”- 0.16” reveals that 16 percent adjustment has been occurred during the year in the short run-in economic growth. This study also shows that inflation and Terms of trade volatility in Pakistan has negative relation. When Inflation increases terms of trade decreases and vice versa. It reveals that a low and stable rate of inflation boost the trade which leads to prosperity of the countrymen while high rate of inflation is detrimental for economic growth and Trade.