An Empirical Analysis in Effect of Macroeconomic Factors on Inflation for Pakistan

Abstract

The current study is an effort to empirically assess the effect of various macroeconomic factors on inflation in Pakistan by utilizing ordinary least squares (OLS) method and Granger non-causality test in the time-series framework from 1973-Q3 to 2017-Q2. The empirical results confirm that real GDP, money supply, imports, government expenditure, and lagged inflation have a positive and considerable influence on inflation while interest rate has an adverse impact on inflation. Additionally, the findings demonstrate bidirectional causality between money supply and inflation, while the unidirectional causal relationship is found from government expenditure and imports to inflation. These results signify that inflation does not depend solely on monetary growth in Pakistan; however, imports and fiscal policy are also contributory factors that have a considerable impact on inflation. The study concludes that central authority would not accomplish the stabilize prices through changing the monetary policy until and unless the government will not fix the fiscal deficit.