THE RELATIONSHIP BETWEEN INFLATION AND ECONOMIC GROWTH IN PAKISTAN: AN ECONOMETRIC APPROACH

This paper examines the relationship between inflation and Gross Domestic Product of Pakistan. A time series data has been used to check the relation between inflation and GDP for the period of 1971 to 2011. Granger Causality test and Ordinary Least Square method has been used to obtain the empirical evidence. The results of Granger Causality test suggest that GDP causes inflation. The results of OLS reveal that there is a positive relation between inflation and economic growth of Pakistan. One percent increase in inflation will raise GDP by 0.45%. Inflation encourages productivity and output level. Policy makers should make such type of policies that increase ouput by improving productivity. It will reduce the prices of goods and services. The findings are consistent with a similiar study (Aminu Umaru (2012).