Factors Influencing Inflation and Economic Growth in Pakistan: An Econometric Analysis

Abstract

This paper made an econometric investigation of inflation and economic growth in Pakistan for the period 1990-2017. Money supply, imports, exchange rate and budget deficit were the major causes of inflation. Growth in GDP is expected to lead to a reduction in inflation. To combat inflation, unwarranted growth of money supply is checked and the exchange is stabilized. It is less likely that imports are reduced to lessen inflation due to economy needs. It appears difficult that GOP succeeds in curtailing the BD because of the widespread corruption and money-laundering. Human resource development coupled with investment and value-added by both agriculture and industry contributed significantly to economic growth. Should the policy makers attach genuine attention to these factors, it is expected that Pakistan economy will perform reasonably well. Specification and diagnostic tests revealed the appropriateness and soundness of the inflation and economic growth models. Parameters stability was examined for two periods (1991 and 2002). CPI showed stability in both periods but GDP did not demonstrate in the second period.