Economic Management and Roots of Inflation in Pakistan

Ayesha Noor and M. Aslam Chaudhary

Abstract

This paper explores and analyzes the main determinants of 
inflation in Pakistan. A dynamic inflation model was developed 
to analyze the short run and long run behavior of the inflation. 
For estimation, the annual data series for the period 1972-2007 
was utilized. The results indicate a positive relationship of price 
level with money supply, import prices, budget deficit and 
expenditures on services sector. The results of Error Correction 
Model suggest high speed of convergence to equilibrium, if there 
appears a dis-equilibrating shock. The study also highlights that 
inflation might be controlled by curtailing dependence on 
external factors i.e. reducing unnecessary imports. Based on 
study’s results, it is suggested that the main financial cut should 
be on non-development expenditure, not on development 
expenditure. Moreover, the policy makers need to consider all 
factors analyzed by the study, to have effective control over 
inflation.