TITLE:
Correlation and Causality between Inflation and Selected Macroeconomic Variables: Empirical Evidence from Pakistan (1990-2012)
AUTHORS:
Mehwish Nawaz, Muhammad Naeem, Sami Ullah, Salim Ullah Khan
KEYWORDS:
Inflation, Correlation, Deficit, Macroeconomic, Variables, Pakistan
JOURNAL NAME:
iBusiness,
Vol.9 No.4,
December
22,
2017
ABSTRACT: Inflation is regarded as one of the most chronic
problems in
Pakistan and the recent surge of inflation (10.8) in consumer price index is a
matter of serious concern in the economy [1]. Inflation imposes high cost on
economies and societies;
disproportionately hurts the poor and fixed income groups, creates uncertainty throughout the economy and undermines
macroeconomic stability. It also results in inefficient resource
allocation and hence reduces potential economic growth. High inflation has
always penalized the poor. Lowering inflation therefore, directly benefits the
low and fixed income groups. The present study
focuses to examine the impact of various macroeconomic variables on inflation in Pakistan and to find their correlation
and causal relationship with economic and econometric criterion by using
time series data over the period of 1990 to 2012. To achieve this objective,
regression analysis, correlation coefficient and granger causality test are
used. Results from regression analysis indicate
that money supply, government expenditure, government revenue, foreign direct investment and gross domestic product have
positive impact on inflation in
Pakistan, while interest rate shows negative impact. Correlation analysis confirms that there exists a positive
association of inflation with money supply, government revenue, interest rate, foreign direct investment, gross domestic product, exchange rate and trade openness.
The findings of the study also reveal that money supply as well as balance of trade granger causes inflation in the
selected time period. I recommend that monetary and fiscal measures
should be wisely coordinated in order to control the consistent increase in
prices. The government should curtail expenditure and reduce money supply.
Similarly, domestic production should be encouraged and trade deficit should be
narrowed by increasing exports in the country.