Does Inflation Affect Economic Growth? The case of Pakistan

The major purpose of this study is to re-examine the existence of inflation growth relationship in the economy of Pakistan and to analyze empirically the impact of inflation on GDP growth of the economy. It is, further, to investigate 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 2009-10 have been taken and analysis is made by employing the method of Ordinary Least Squares (OLS). A negative and significant inflation growth relationship 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 below the 7 percent level and to keep it stable. So that it may exert its positive effects on economic growth of the economy