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Determinants of Inflation in Pakistan: A Comprehensive Analysis of Macroeconomic Variables (1991–2022)
This research paper examines the determinants of inflation in Pakistan from 1991 to 2022. It focuses on key macroeconomic variables such as imports, GDP growth rate, GDP per capita, military expenditure, population growth, total debt service, and unemployment. The primary objective is to analyze the impact of these variables on inflation and provide policymakers with practical recommendations. Using annual time-series data from the World Bank's reliable WDI source, the study utilizes descriptive statistics, correlation analysis, ADF unit root tests, regression analysis, and an autoregressive distributed lag (ARDL) model. The results indicate significant interdependencies between the variables under study. Correlation analysis reveals a strong positive relationship between inflation, imports, and military expenditure, while GDP per capita and population growth are negatively correlated with inflation. The OLS results confirm that increases in import volumes, public debt service, and GDP growth accelerates inflation, while increases in per capita GDP, military spending, and population slow it down. Short-term dynamics show that inflation quickly adjusts to economic shocks, with imports and GDP growth having an immediate impact. These findings highlight the importance of monetary policy aimed at managing imports and optimizing debt servicing strategies. Furthermore, policies that promote accelerated economic growth and increased per capita income are also necessary. Effective debt management and strategic military spending are also crucial for maintaining price stability. Furthermore, it is necessary to more fully examine structural breaks and nonlinear effects in inflation dynamics, as well as consider the influence of external factors, such as global oil prices. This study makes an important contribution to understanding the complex economic relationships affecting inflation in Pakistan. It provides policymakers with a valuable resource for developing effective strategies aimed at ensuring economic stability in developing countries.