The Nexus Amongst the Interest Rate, Inflation and Economic Growth in Pakistan: Evidence from Simultaneous Equation Modeling

Ijaz Uddin and Rafi Ullah
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Ijaz Uddin: Abdul Wali khan university Mardan, Pakistan
Rafi Ullah: Khyber Pakhtunkhwa, Pakistan

Economic Alternatives, 2024, issue 1, 45-58

Abstract: The main objective of this empirical study is to analyze the nexus amongst the interest rate, inflation and economic growth in Pakistan: evidence from simultaneous equation modeling, for the period from 1970- 2019. The estimate of the ADF test shows that all variables are a mixed order of integration, and the Johensan cointegration estimate reveals that there exist long-run relations amongst the variables. The estimate of the robust least square shows that inflation, unemployment, money supply, exchange rate, and budget deficit, have a positive effect on GDP per capita, while interest rate, total investment, and FDI have a negative effect on GDP per capita. Moreover, inflation and exchange rate have a positive effect on interest rate, while money supply, budget deficit, and FDI have a negative effect on interest rate. Furthermore, the interest rate has a positive effect on inflation, while unemployment and money supply have negative effects on inflation. Policymakers should adopt a sound macroeconomic policy to enhance economic growth and control the interest rate and inflation.

Keywords: economic growth; interest rate; inflation; Simultaneous Equation Modeling; Pakistan. (search for similar items in EconPapers)
JEL-codes: A10 A11 A12 (search for similar items in EconPapers)
Date: 2024
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