Determinants of Inflation in Pakistan: A Comprehensive Analysis of Macroeconomic Variables (1991–2022)

Abstract

This research paper investigates the determinants of inflation in Pakistan from 1991 to 2022, focusing on key macroeconomic variables such as imports, GDP growth rate, GDP per capita, military expenditure, population growth, total debt service, and unemployment. The main objective is to analyse the impact of these variables on inflation and provide policymakers with actionable insights. Utilizing annual time series data from reliable source World Bank WDI, the study employs descriptive statistics, correlation analysis, ADF unit root tests, regression analysis, and the Autoregressive Distributed Lag (ARDL) model. The findings reveal significant interdependencies among the examined variables. The correlation analysis shows strong positive relationships between inflation and imports and military expenditure, while GDP per capita and population growth negatively correlate with inflation. OLS results confirm that imports, GDP growth, and total debt service significantly raise inflation, whereas GDP per capita, military expenditure, and population reduce inflation. The ARDL model reveals that, in the long run, imports, GDP growth, and debt service positively affect inflation, while GDP per capita, population growth, and unemployment exert downward pressure. Short-run dynamics indicate that inflation quickly adjusts to economic shocks, with imports and GDP growth having an immediate impact. These findings highlight the importance of managing imports and debt, while promoting economic growth to maintain price stability. The policy implications emphasize the need for targeted monetary policies to manage imports and optimize debt service strategies, as well as policies aimed at enhancing economic growth and increasing per capita income. Effective debt management and strategic military spending are also vital for maintaining price stability. Despite its comprehensive analysis, the study identifies gaps such as the need for further exploration of structural breaks and non-linear effects in inflation dynamics, and the impact of external factors like global oil prices. The significance of this research lies in its contribution to understanding the complex economic interactions influencing inflation in Pakistan, providing a crucial resource for policymakers to develop effective strategies for economic stability in developing economies.