Inflation and Economic Growth: Empirical Evidence from Pakistan

Abstract

The major purpose of this study is to examine the inflation and economic growth relationship in the economy of Pakistan and to analyze empirically the impact of inflation on GDP growth of the economy. It also has been investigated that whether it encourages or hurts the economic growth in a uniform way or it behaves differently under different levels. Annual time-series data for the period 1972-73 to 2010-11 has been taken and analysis is made by employing the method of co-integration and Error correction model (ECM). A negative and significant inflation growth relationship relation has been found to be existed in the economy of Pakistan. The results of the study show that prevailing inflation is harmful to the GDP growth of the economy after a certain threshold level. On the basis of the descriptive and econometric analysis, we may suggest to the policy makers and the State Bank of Pakistan to restrict the inflation so that it may exert its positive effects on economic growth of the economy.