Open AccessRelationship between Inflation and other Macro Economic Variables in Pakistan
Author(s) -
Adnan Ali,
Farzand Ali Jan,
Sami Ullah Khan
Publication year - 2015
Publication title -
journal of management info
Language(s) - English
Resource type - Journals
eISSN - 2663-0532
pISSN - 2313-3376
DOI - 10.31580/jmi.v8i1.44
Subject(s) - economics , deficit spending , distributed lag , inflation (cosmology) , short run , money supply , macroeconomics , econometrics , government budget , macro , autoregressive model , government (linguistics) , monetary economics , monetary policy , public finance , debt , linguistics , philosophy , physics , theoretical physics , computer science , programming language
Conventionally, it is claimed that persistently higher deficit in government budget may cause the inflation to rise in the long run but this relationship is not conclusive empirically. Therefore, the present study is aimed to determine the relationship between inflation and other studied variables of macroeconomic i.e. fiscal deficit and supply of money in the short run as well as in the long run in Pakistan. the bound testing approach to co-integration and VAR model, established within an autoregressive distributed lag (ARDL) is used to annual data of time series covering the period of time from 1960 to 2010 for examining the studied variables both in short run as well as in long run. The conclusion of the study shows that the relationship between the studied variables is insignificant in the long-run but the outcomes of VAR model illustrate that a short run positive relationship between the studied variables cannot be ignored. The study further indicates that 1% change in budget deficit and money supply caused to change the inflation by 0.29 and 0.31 times respectively in the short run. The results provide strong evidence that the government may target reducing the inflation by generating domestic economic resources to boost the economic growth instead of reducing budget deficit.