Revisiting Inflation-Growth Nexus in Pakistan

Abstract

The inflation-growth nexus is a highly debatable topic among economists. Various school of thoughts have varying views about the relationship between economic growth and inflation. While the classical economists had a view that the relationship between inflation-growth as positive, Keynesian claim a negative nexus. There is a plethora of research on the relationship and dependencies among macroeconomic variables. The volatile nature of the macroeconomic variables necessitates to revisit the relationship each new day. Studies related to Pakistan are also evidence that macroeconomic variables, of which inflation and economic growth is a very popular topic, has been the focus of research. However, the recent studies did not report the inflation-growth nexus; shifting the subject of research towards the inclusion of other variables which are also important but not as much as a growth-inflation nexus. Hence, in the present study attempt is made to enquire about the relationship between inflation and economic growth in the case of Pakistan. The research is based on log run time-series data for 1985-2019. ARDL, Wald, and F-bound statistics were used for finding a long-term relationship between variables.  The results reveal that inflation has a strong negative effect on economic growth. The descriptive statistics showed that the GDP data is consistent and stationary at level. The inflation data was not stationary at level and had a higher standard deviation. However, both the series were normally distributed. The value of “-0.16” reveals that there has been a 16% yearly adjustment to economic growth in the short run. The study suggests keeping inflation at low levels for better growth and terms of trade.