AN EMPIRICAL INVESTIGATION OF DOMESTIC AND EXTERNAL DETERMINANTS OF INFLATION IN PAKISTAN

Abstract

In this study ARDL approach is applied for estimating the long-run and short-run relationship among the variables using annual data for the period 1972-2010. The results show that in the long-run money supply growth, lagged inflation, foreign inflation and dummy variable for global financial crises 2008 have positive and significant impact on inflation in Pakistan. Further, except money supply all the variables affect inflation in the short-run. The significant and negative coefficient of lagged error correction term is an indication of the convergence towards long-run equilibrium. The study recommends that in rapidly globalizing world, serious considerations need to be given by policy makers to external shocks like foreign inflation and global crises for formulating policies which help in controlling inflation in Pakistan.

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