INDUS INSTITUTE OF HIGHER EDUCATION

KARACHI

Impact of inflation on economic

growth :an overview on Pakistan
[FINANCE THESIS]
[IQRA IRSHAD]
[B.B.A :08-A]

SUPERVISED BY : SIR NAWAZ AHMED

Turnitin Originality Report

Impact of inflation on economic growth: an overview on Pakistan
By
Iqra Irshad (ID- 5-2008 BBA-08A)

Processed on 07-Feb-2012 10:26 PKT

ID: 227954564
Word Count: 7336

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Nawaz Ahmed
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Usman Ali
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Faculty of business administration

INDUS INSTITUTE OF HIGHER EDUCATION

Karachi

CERTIFICATE
I am pleased to certify that Ms Iqra Irshad D/o Mohammad Irshad has
satisfactorily carried out a research work, under my supervision on the topic of
impact of inflation on economic growth:an overview on pakistan.
I further certify that her distinctive original research and her thesis is worthy of
presentaton to the faculty of management sciences, INDUS INSTITUTE OF
HIGHER EDUCATION Karachi for the degree of B.B.A (FINANCE).

SUPERVISOR:

_________________________

ACKNOWLEDGEMENT
I would like to thank Mr Nawaz Ahmed my supervisor who has given me
Many useful comments related to my topic. After his guidence I am able to complete my
thesis through his step by step support for my research work.Also I would like to thanks to
Mr Javed Iqbal who checked my work on short term notice and appreciat my work by both
of persons also a lot of detailed and valuable comments on this thesis. The same
appreciations will be for members from my thesis group and for the teacher and members
from my groups in course.

DEDICATION
This thesis is dedicated to my parents who introduced me to the joy of reading from
birth enabling such a study to take place today.

TABLE OF CONTENTS

Abstract. 5
SECTION
1. Introduction. 6
2. LiteratureReview. 14
2.1 empirical review.15
3. Hypothesis.. 30
4. Variables..30
5. Model and frame work 30
6. Methodology.. 31
6.1 model specification and estimation technique.. 33
7. Results and discussions.. 35
7.1 Data and summary output..... 36
8. Conclusions ... .38
TABLES
REFERENCES . 40
APPENDIX. 43

ABSTRACT
The thesis is to find out the impact of inflation on economic growth in Pakistan by using the
data from 1950 to 2010. This thesis uses the regression linear model to find out the impact
on gdp growth. This study is basis on manzoor hussain who,s findings are insignificant and
also similar to singh (2003) which recommands that the rising prices within 4 to 6 % is
favorable for pakistan and central bank should keep the policies favorable for the growth.
As my findings+ are insignificant that there is no impact of inflation on economic growth.

INTRODUCTION:
Last many year research work on economics has described many reasons of
relationship between rising price and economic increase. One major purpose of
this research work after identify the rising price is bad thing to economic increase
get the week points or effected points. Some research define a threshold rate of
rising price above the economic increase is negative and significant due to rising
price effects, while the positive level of economics increase is below level of
threshold rate of rising price.
Even so, as the important results by the previous research work on many different
purposes across the countries these results are shows that when the rising price is
effect on economic increase there is no general agreement over the point.
This document described the major point is that using a regressing formula there
is many possible reasons available of inflationary effects on the relationship
between economic increase and financial sector development. In general
macroeconomics holds that to promote economic increase the combination of low
rising price and financial development is a common factor without this
combination we cannot promote economic increase. The interesting and debate
article is the question of nature connection between financial development,

economic increase and rising price. This is also true that this topic and the
relationship between these three variables is already using in debates and research
point of view. In Large general agreements about connects of these three variables
economic increase, rising price and financial development has been reached.
Commonly the concept of long term and medium term reaction of rising price,
product increase and reducing investment on economic increase is negative.
The major aim of policymakers is low rate of rising price if rising price is a main
blockage of promoting economic increase, Even so what is the target level of
rising price is? How rising price low level is positive impact on financial
development and on economic increase? In the other way it is possible to obtain
the threshold level of rising price point if a non-linear relationship found between
rising price and economic increase, and what is the sign of relationship between
rising price and economic increase would controlled. Fischer was first identified
the non-linear relationship, he found that at low level of rising price rate the long
term relationship between rising price & economic increase is positive, and at
high level of rising price rate it become negative.
Accordingly the very deep study about the non linear economic increase and
rising price, there are many possibilities and factors that explain the existence of
rising price threshold effects on the relationship between economic increase and
financial development, nowadays the deep study and theoretical research about
relationship of economic increase and rising price suggests that promoting the
economic increase the financial market playing an important role. Thus we can

say that financial market activity goes down and up if changes in the rate of rising
price, it is possible that some changes would have long term real activities
implication. Moreover these theoretical studies provide strong evidence to prove
that financial developments promote economic increase under the moderate and
low rate of rising price. Causality test tells the relationship about rising price and
economic increase causality. According to Okuyan and Erbaykal there is casualty
found in relationship of rising price to economic increase and also tells there is no
causality connection found between economic increase and rising price.
On the opposite in nature, financial development dose no produced any type of
effect on economic increase under high rising price environment. The basic
reason of this situation is that in a rising price environments investment project
information flow and intermediates returns being used become less readily
available and unsure of himself and his future. Suppress a nascent uprising
economic development due to information costs and rising price increases
transactions. High rising price conditions can put out of one's consciousness
financial intermediation by grinding something down the unimportant of money
assets and policy decisions become a cause distort the financial structure.
The following accepted customs and proprieties view in microeconomics holds
that changes in the rate of rising price by nature. These changes in the long terms
do not affect real activity. Even so the expert view of solution terms that even in
the long term period the rising price high rates can have made a place for
themselves under the most untoward conditions for real economic increase. In

10

these days the major topic amongst economists is that the problem of aggregate
economic performance and some individuals is high rates of rising price. Even so
there is a very few general agreements about the characterized by perfect
conformity to fact or truth between relationship economic increase performance
and rising price and by the method in which rising price effects on economic
increase. The effects of long term activity increase in rising price rates is very
alarming point. The general agreement about the an opposing direction effects of
rising price on real economic increase show only a some part of the complete
picture. In some previous researches has focused on the non-linear relationship
between rising price and economic increase. The first condition is at lower rate of
rising price in this condition the relationship is not important in effect or even
positive on economic increase but at higher rates of rising price has important
negative effect on economic increase.

11

What level of inflation is harmful to growth?

Theory
Basically economic research theories results based on about the outputs of
economic increase to rising price. These economic theories are very useful
because the concept of these theories based on observed hypothesis. Historically
in the missing word meaning of term Continually recurring to the rising prices
the early researches about the rising price and economic increase were built on
cyclical results, continually recurring to the rising prices is regarded as a post
world war 2 reasoning. In advance of then, rising price rounds were followed by
turn of deflations. Rising price act like a lazy dog that is not doing anything like
upward level and downward level trend. The rising price level doing nothing but
it is stable in a exceptional level unless and until there is any perturbation.
Thenceforth, the rising price moves to another level at which rising price
determines. Theory, thus being searched for account a positive correlation
position between rising price and economic increase. The aggregative supply and
aggregative requirement model also tells that positive behavior of rising price and
economic increase, where the rising price effects on economic increase and
economic increase is increased. Even so, in the 1970s the concept of stagflation
rise hump and the credibility, of the positive connection was questioned. At that
12

time Phillips Curve relationship appeared and widely accepted. In this reason the
rate of rising price very high level and also the Phillips Curve relationship is a
clue of low and negative output economic increase.
In this document the coming after sub-sections we spend some time classic
Endogenous increment possibilities, Neo-classical, Monetarist, Neo-Keynesian
and Keynesian, every component playing an important role to the economic
increase and rising price relationship. Classic economics recollect supply side
possibilities if the nations economy is to grow the supply side theories underscore
the need for bonuses to save and devote, joined to the land capital and exertions.
Under the Ad-AS framework the Neo-keynesian and Keynesian theory
give some important and bit by bit framework for linking rising price and
economic increase. Monetarism explain the Quantity possibilities, and playing in
important role of pecuniary increase in characterizing rising price, Endogenic &
Neo-classical increment theories searched for the effects of rising price on
economic increase through its behavior on capital collection and investment.
This research is present the important and useful difference among the solutions
of theoretical studies, in the different countries the ration of rising price on
economic increase is different. Even so, some theoretical results was quite large
which show some results about the threshold rate of rising price according
different countries. For example in India Mr. Singh show some important results
on threshold level of rising price and Mr. Mubarik show useful result about
threshold level of rising price in Pakistan and he also said the threshold level of
13

rising price is 9 percent in Pakistan. Some other researches about threshold level
of rising price for both types of countries like growing and developed. Even so,
Senhadjis and Khan Works on threshold level of rising price for both types of
countries like growing and developed. They said threshold level range 7-11
percent for the growing countries including Pakistan. jing xiao find that conintegration framework enclosing correlation matrix and granger casualty test tell
the situation of relationship between rising price and economic increase. The
rising price results show positively on economic increase relationship in the long
term period.
Rising prices is importantly correlated utilizing the economic increase rate. The
simple regressions panel indicates or described the relationship between three
variables rising price unevenness economic increase and rising price. Now it is
possible with the help of increment accounting model to spot that main grooves
through which rising price comes down economic increase.(fischer).
According to (lee and Wong) that rising price threshold occurs in the connection
between financial Development and increment. Now we can say that some
changing in the rising price directly effect on the connection between two
variables financial development and increment.
Consequently, geomorphologic upgrade in rising price threshold level should be
taken when constructing and prediction models of economic increase.
Pakistan for the period 1973-2005 describes the threshold level of rising price in
Pakistan. In the end of this survey the write finds that there is no any threshold
14

level of rising price in Pakistan. Mubarik (2005) is the main person (director) to
find 9 percent of rising price threshold level in Pakistan and all other solutions.
This study also shows that there is 5 percent contemporaneous rising price is
found in Pakistan that is a positive impact on economic increase. Further study
shows that the impacts of contemporaneous rising price on economic increase is
good but also show some insignificants. After discuss all the requirements and
fundament of the inference reaped from the survey we easily say that the
acceptable range of the rising price in Pakistan 4-6% this rang of rising price is
helpful for maintain economic increase. Similar idea described in India by Singh
in 2003 that the target rising price range is 4-7% suitable in India for economic
increase. In Pakistan the rising price is the subject of supply and demand shocks.
In Pakistan Central Bank of Pakistan should keep the rising price in rang.

15

LITRATURE REVIEW
Jing Xiao
According to Jing xiao the relationship between economic increases and rising
prices of china. Previous literature cannot obtain any unambiguous solution on
these problems. This research report will mistake rectification and employ conintegration models attaching granger causality test and correlation matrix examine
the economic growth and rising prices relationship. This information is annual
time series from 1978 to 2007 of china. The long run rising prices solutions show
positively relate to economic increase relationship. When china develops
economy they must pay attention to price level. The cause of rising prices in the
short run period would be high speed increase of investment.
Raghbendra Jha and Tu Dang
According to annual information of economic increase and rising price variability
we see the results on both growing and modernized countries. The information of
1961-2009 period cover 31 modernized countries and 182 growing countries. We
obtain the following solution by five year coefficient of variation of rising prices

16

In growing countries we suggest according to significant evidence that rising

price variability has show a negative impression on economic increase when the
rate of rising price surpasses 10 percent. In modernized countries the increase of
rising price is under control there is no any evidence to increase rising price.

Alexander Bick
This research paper described the relation between rising price and economic
increase confirms that the left out variable diagonal of received dialog models can
be economically significant and statistically.
This important investigation shows the result according to abstraction of Hansens
(1999) dialog box tolerance simulation that the relationship between rising price
and economic increase for growing countries. Doorstep ideas and Regression slop
both are discussed and these readily available for regressors the possible prejudice
of excluding and authorities intercepts.
Yasir Ali Mubarik
According to annual information from 1973 to 2000 we discuss the level of rising
prices in West Pakistan (la khan and senhadji 2001). After discuss all the
conditions and requirements of threshold model and finally its predisposition
results using information of rising prices and economic increase of home country
and after study we get following major points. We can define causality directions
from rising prices to economic increase and not other way around after causality
test. The red alert economic increase is raising prices and threshold model analyze
17

9 percent recommends threshold rising prices level for economic increase. The
powerful solutions, obtain form indicates exact level of threshold rising prices and
validity of the model, this deeply research study indicates that the main reason of
economic increase is rising prices level below 9 percent. These results might be
providing best results in determining an optimal rising price target. All the same,
these results does not indicate that economic increase is low the level of rising
prices.
Erman Erbaykal and H. Aydn Okuya
In this survey document writer defines Turkey analyze in our country the
relationship between economic increase and rising price in the periods of 1987
and 2006. In both periods turkey analyze with the help of Bound Test developed
Pasaran et al. (2001) these test show the results of long term relationship between
these two components economic increase and rising price and coming after the
test result relationship between two rows of the macrocosm of co-integration
collaboration. There is no any result found about numerical significant long term
relationship with formed ARDL models and there is also short term numerical
significant relationship and negative results found. Causality test represent the
causality relationship between two rows. According to Causality test there is no
causality relationship found between economic increases to rising price if
causality relationship found it has been raising price to economic increase.
Monaheng Seleteng
This survey tries to explain according to quarterly time-series information for the
18

periods 1981 to 2004 that rising prices optimal levels perform the main role for
economic increase in Lesotho, we can easily converted all annual information to
quarterly time-series information by using Three dimensional interpolation
technique engrafted in Eviews econometric software . These quarterly time series
information show 10 percent optimum amount of rising price based on rising
price is detrimental for economic increase. According to this result any rising
price rate above this optimum level become a reason of economic increase.
Manzoor Hussain
In this document writer tries to explain the primary thing is that to using annual
information of Pakistan for the period 1973-2005 describes the threshold level of
rising price in Pakistan. In the end of this survey the write finds that there is no
any threshold level of rising price in Pakistan. Mubarik (2005) is the main person
(director) to find 9 percent of rising price threshold level in Pakistan and all other
solutions. This study also shows that there is 5 percent contemporaneous rising
price is found in Pakistan that is a positive impact on economic increase. Further
study shows that the impacts of contemporaneous rising price on economic
increase is good but also show some insignificants. After discuss all the
requirements and fundament of the inference reaped from the survey we easily
say that the acceptable range of the rising price in Pakistan 4-6% this rang of
rising price is helpful for maintain economic increase. Similar idea described in
India by Singh in 2003 that the target rising price range is 4-7% suitable in India
for economic increase. In Pakistan the rising price is the subject of supply and

19

demand shocks. In Pakistan Central Bank of Pakistan should keep the rising price
in rang.

David Drukker
In this survey writer described a question is super-neutrality of money. A
currently theoretical solution presents threshold model alternates of superneutrality.the theoretical solution show that the threshold level of rising price
more than the effect of rising price on long term increase changes. We use new
economic methods to obtain the solution and some other results in non-dynamic,
panel-information model and fixed-effects that have threshold effects. The
solution describes that rising price has a nonlinear effects on economic increase.
Our solution and theoretical work in which describes that rising price effects on
economic increase. The coefficient sign on investment is difference between the
industrialized and non-industrialized subsamples, and the coefficient on openness
has a positive sign are provide interesting solutions.
In the future research our aim we applying threshold techniques will causes the
estimate co-efficient on openness to agree with standard hypothesis.
Girijasankar Malik and Anis Chowdhury.
In this important research document, the authors using annual information t o

20

describes the relationship both long term and short term dynamics of the rising
price and economic increase of four South Asian Countries. In this document the
authors used error correction and co-integration models to explain the long term
and short term relationship of economic increase and rising price. In this research
the main objective of the document is to analyze the relation between economic
increase and rising price if there is any relation between these two variables, its
by nature and no other reason for this relation exit. After study all important and
useful requirements authors are found two main results about economic increase
and rising price, 1. The relationship between rising price and economic increase
are positively related. 2. The Changing in growth rates after changing in inflation
is bigger than that increase to changes in rising price rates. These results describe
some important points and these points have important policy implications. The
helpful advice to reduce economic growth our main and very important step is
attempts to reduce rising price to a very low level. Even so, we can easily
attempts to achieve faster economic growth may be the inflation rate are becomes
unstable. Thus, these points and ups and downs are on a knife-edge.in this
document the main challenge for the authors is to search a growth rate level which
is stable rising price rate continuously if authors cant find the level of economic
growth than first beat inflation then control the faster economic growth rate
levels. The basic thing of economic increase is rising price and as per ruled by
Bruno and Easterly (1998) this is very tough condition that the economic growth
rate may speed the rising price rate and take it down.
Shamim Ahmed and Md. Golam Mortaza
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This research paper explores the present condition between rising price and
economic increase in Bangladesh. Some basic assessment has been adopting
throughout the error correlation and co-integration models. Further more in this
paper explain the economys threshold level of rising price and explores an
interesting policy issue about economys threshold level of rising price. The deep
study clues pointing that there is a negative long term statistical importance
relationship for a country between rising price value and economic increase and
also indicates negative along term relationship statistically importance between
CONSUMER PRICE INDEX and real GROSS DOMESTIC PRODUCT.
Authors have mentioned in this paper about situation of rising price value and
economic increase in Bangladesh in late 1990s and they said Bangladesh was
already on the turning point (from positive to negative) of rising price value and
economic increase relationship. Authors also define the level of threshold if rising
price increases this level than affect on economic increase and the recommended
6 percent threshold level of rising price.
These solutions show some important policy that applies on both development
cooperators and domestic policy makers. The first thing about these policy that
that rising price rate is not listed in the salaries and wages. The rising price will
effect on buying force and an improve cost of living. Second thing is that country
continuously perform tasks to balance the credit requirements by the private and
public sectors against both balance of payments pressures and inflationary.
According to contractionary monetary policy 11 it is not always possible to
22

monetary authority to maximize the nominated interest rate above the expected
rising price rate. That is way the monetary authority is work to reduce rising price
using an alternative methods and procedures.
Some points are in order. For Example in this context of Bangladesh, the solution
provided in this documents do not address the following important issues.
1. It is not possible to say that how the economic increase rate will show the
results and the rate
Of rising price rises. But the rising price remains within the threshold level.
2. The greater rising price uncertainty cause is higher rising price and what is the
relationship between rising price uncertainty and rising price.
3. Whether rising price directly or indirectly involves in economic increase.
4. What is the main purpose of high inflationary pressure?
Vikesh Gokal and Subrina Hanif
According to Gokal and Subrina the main purpose of the document was to explain
the basic and significant relationship between rising price and economic increase.
According to deeply study about rising price and economic increase and
hypothesizes, the survey show some useful and very important perceptiveness
behave of rising price & economic increase like magnitude. In Michael report he
found after 8 percent structural break rising price badly affected on increment.
Khan & sendadi found that threshold rising price level for developing countries
23

are 11-12 percent and for industrial countries at 1-3 percent. These results playing
important role to fix the main benefit of maintain rising price stable and supply a
useful penetration into the relationship between two components. Looking
specifically rising price performance between the two variables is not surprising
under the heavy duty link, given the influence rising price current topical cream
construction of the economic system and factors. Negative weak link shows only
correlation co-efficient and operate from economic increase to rising price shows
causality.
According to some other surveys to importance of maintain low rising price
provide some important points for Fiji policymakers in order to foster higher
economic increase.
Chien-Chiang Lee and Swee Yoong Wong
According to Huybens and smith, Gylfason and Herbertsson and Bose rising price
will effect on financial market through real economic activities. Same results are
produce for American countries by Gregorior and Guidotti. When American
countries faced in 1970s and 1980s high rising price rate, financial development
retarded economic increase. The main purpose of this study investigates the
relationship of three variables for Japan & Taiwan and these three variables are
raising price, financial development and economic increase. Toward investigate
the relationship of these three variables, to investigate the effects of possible
rising price on remain two variables relationship between financial development
and economic increase; we employed the TAR approach reduced by Tong &
24

Hansen. After investigate we find that there is one rising price threshold value
condition in Taiwan and two rising price threshold value conditions in Japan.
The estimation results of processing on annual increase rate of rising price and
exploring the effects of financial development on economic increase under unlike
rising price routines that when the rising price level of threshold below
7.25percent and higher than 7.25 percent than the financial development may
upgrade economic increase for Taiwan and financial development will not
produce any effect on economic increase respectively. Accordingly financial
development upgrades economic increase under low level rising price. In Japan
the deeply study results show that when the level of rising price of threshold is
below 9.66 percent than financial development show some useful effect on
economic increase. However, when the rising price above threshold level
financial development is prejudicious to economic increase. In the end of this
document the conclusion that Japans rate of rising price is low or temperate when
the financial development will promote economic increase can be established and
we find this result with the help of Huybens and Smith, Bose, and Rousseau and
Wachtel. In Taiwan and Japan the guessed result obtain in this study that rising
price threshold occurs in the connection between financial Development and
increment. Now we can say that some changing in the rising price directly effect
on the connection between two variables financial development and increment.
Consequently, geomorphologic upgrade in rising price threshold level should be
taken when constructing and prediction models of economic increase for Taiwan
and Japan.
25

Minli
Now a days economists believe that high rates of rising prices is a cause of many
problems not just for on problem it is a reason of many problems. but for mass
economic interpretation. Even so, very low range of agreements available about
the prices relationship between rising price & economic increase behavior and
environment by which rising price effect on economic increase,
The first portion of the document by the help of increase expenditure formula &
the increase accounting formula explain the effects of the rising price on
economic increase performance in both type of growing and developed countries,
the solution supported the nonlinear relationship between rising price and
economic increase. In further both types of countries growing and developing
countries show different types of reactions of nonlinearity between the rising price
and economic increase relation.
In the growing countries, the information about rising prices and economic
increase shows that two threshold available in the function relating rising price
and economic increase. The first level of threshold was showed 14 percent, &
second level of threshold was showed 38 percent. In the first threshold level the
rate of rising price is low similarly the effects of rising prices on economic
increase are positive and acceptable level. In The level two rising price rates for
Moderate which are between the two threshold levels the effects of rising price on
economic Increase is negative and rate of rising price is very high. at exceedingly
high rising price rate, the borderline shock of part rising prices on economic

26

increase lessens speedily but is stillImportantly negatively charged.

In the developed countries, there is one threshold is discovered and the it is very
important, the level of threshold is stronger to estimation suggests and model
stipulations and this important threshold level is discovered at 24 percent, Both
types of levels of threshold works are same in growing countries and developed
countries that is way the rate of rising price is below the level of threshold 24
percent. The main reason of negative economic increase is raising price while the
importance of this negative effects on rising price exceeds this level of threshold.
In this document define 2 levels of thresholds for both types of countries growing
and developed, the effects of both level on these countries are follows: in the first
level of threshold defines (what rising prices blocks increment, but subwoofer
which ever rising prices has no pregnant or even positive results on increase),
whereas in the second level of threshold (in this level defines the large amount of
drop in the marginal effects of rising price occur). Further in this document
explain nonlinearity effects on both types of countries (growing and developed),
and growing and developed countries have a different type of nonlinearity in the
rising price and economic increase relation.
For growing countries these researches show some useful and well define policy
implication. First define the range of marginal negative effects on moderate rising
price and the range is 14 to 38 percent is mentioned. We can reduce economic
increase by about 0.2-0.4 percent points if increase in rising price by 10 percent
point per year will effect on economic increase rate. This advice effect on long
27

term moderate rising price on increase will lead to a substantial negative effect on
economys performance.
Second important thing in this document for policymakers will not keep the rising
price level at 0 percent since the first level of threshold of 14 percent does not
impede & even stable economic performance. Third main thing in this document
hyperinflation and it is not have any hyper-inflation effects of economic increase
because moderate rising price is grater that marginal impact of hyperinflations
similarly we can say that decrease in the hyperinflation rate have not any
important effects on economic increase. Therefore the main goal of policymakers
in growing countries is controlling moderate rising price.
India has managed its economic stability at the most appropriate way. There are
only two incidents which show the economic stability but they have managed
their demands and supply very effectively. Indian monitory and fiscal policy helps
the country in managing its financial increase and stability through the year and
helps in its people growth. Since the developed countries express a different
design of nonlinearity in the rising price- economic increase enterprise : the
magnitude of the bad impression of rising prices on increment diminutions as the
rising price rate multiplies, and even the low degree rising prices rate has a potent
disconfirming effect on economic increase, policymakers in developed countries,
unlike those in evolving Lands, should exercise attempts to keep the rising price
rate at zero percent seeing as a little bit of addition in rising prices will cause a
important simplification in economic increase. This determination, to some

28

extent, subscribes the inflation-targeting pecuniary policy espoused by New

Zealand, Canada, the United Kingdom, and other countries.
The second portion of this document is very important and in this season
attempted to find the way which rising price affects on economic increase in a
nonlinear method for long term period. There is two main tools (linear model and
the model with threshold effects) are used for examined the efficiency of
investment and the level of investment. The useful thing is (TFP increase) for both
types of countries growing and developed, but not the investment level
(Investment /GROSS DOMESTIC PRODUCT), the channel which nonlinearly
affects economic growth and rising price adversely is hypothesized by existing
theoretical models.
Further more for growing countries the level of moderate rising price is below 65
percent and for developed countries the level of moderate rising price is below 42
percent, rising price show the significant effects on investment level. Most current
studies explain between rising price and long term economic increase role of the
level of investment (capital accumulation). Thus, according to papers
contribution we can say that the TFP increase is a important channel actually TFP
is only channel through which rising price affects economic increase in nonlinear
method for long term period.

Prasanna v Salian1, Gopakumar. K2

This research motivated by the current developments on the relationship between
rising price and economic increase and also proved some useful and important
29

tips for developed and growing economies. In this document, tally the long term
and short term dynamics relationship of rising price and economic increase by
using error correction model and co-integration model. In India we can tell that
using annual information that the important objective to search that if there is any
relationship in rising price and economic increase available than its any reason or
its nature. The exiting result found about this situation is that first is rising price
and economic increase is negatively related and the second thing is increase to
changes in rising prices rates is smaller than rising prices to changes in increase
rates. These solutions have main policy implications.
In this research the rising price and economic increase nexus has been
systematically analyze in India. The important result is that from the previous
period if any increase in rising price negatively effect on economic increase. The
most desired policy is there is always a constantly down press on rising price
without any information about what is the threshold level. Moreover policymaker
notes that negative effect on economic increase by the any increase in rising price
from the last nay period at any level. The main reason is decision maker and
common peoples do not like rising price has enormous behave on the
consumption method.
In India rising price has commonly under control. Various fiscal monetary and
administrative measures playing an important role in India to control a rising price
there is two period of rising price since 1980 but administrative measures and
various fiscal monetary controlled rising price efficiency. Also the results of

30

investment behavior in private manufacturing tell that an increase in level of

rising price rate is negative behavior on private investment in manufacturing.
India has managed its economic stability at the most appropriate way. There are
only two incidents which show the economic stability but they have managed
their demands and supply very effectively. Indian monitory and fiscal policy helps
the country in managing its financial growth and stability through the year and
helps in its people growth.

Stanley Fischer
Rising prices is importantly correlated utilizing the economic increase rate. The
simple regressions panel indicates or described the relationship between three
variables rising price unevenness economic increase and rising price. Now it is
possible with the help of increment accounting model to spot that main grooves
through which rising price comes down economic increase. In this research
document the author described with help of past research papers and studies that
results of the document inculpated that rising price effected on economic increase
by cutting the rate of productivity increase and trimming down investing. We also
see in exceptional cases that in long term period the low rising price and small
deficits were not important for high increment, high rising prices was not
consistent with survived increment.

31

HYPOTHESIS:

Whether there is impact of cpi on gdp growth.

There is no impact of cpi on gdp growth.

There is no impact of trailing cpi on gdp growth.

VARIABLES:
DEPENDENT: GDP growth
INDEPENDENT: CPI, log CPI
Research is base on quantitative bases and the data collection is on secondary
basis from published data of state bank of Pakistan and some business news
papers including economic survey of Pakistan reports.

MODEL AND FRAME WORK

CPI
GDP GROWTH

32

CPI_1

METHODOLOGY:
Most of the information we collect on this subject used large number of countries
reporting with control panel information and crossbreed sectioned information.
For example Senhadji, khan and Burdekin draped many countries used crossbreed
sectioned information in the diagnostic. If individual countries have a rising prices
increment relationship researchers chose crossbreed sectioned information
because individual country generally lacks the strain of rising price experience
necessary to ascertain. Yet Easterly and Bruno described when information from
countries with 40 percent or more than 40 percent rising price are excluded from
the diagnostic than any crossbreed sectioned relationship between economic
increase and rising price loses importance. In the similar fashion, Barro and
Fischer used control panel information to take into thoughtful the time proportion
of rising price and economic increase. There are very few researches or surveys In
particular countries Mubarik research and Sing research both used in their
research time series data to calculate the rate of threshold rising prices. While in

33

this research reports data about CONSUMER PRICE INDEX, & GROSS
DOMESTIC PRODUCT takes from the State Bank of Pakistan and

Economic

Policy Department libraries or storage machines.

Two types of data information is used to evaluate the mechanism through rising
prices impairs long term economic increase and to inquire the relationship
between rising price and economic increase.
In the period 1951 to 2010 the empirical framework account have used yearly
information of Gross Domestic Product and Consumer Price Index found from the
Pakistan Bureau Of Statistics, in the first phase in this empirical formwork for
example the connection between rising price and economic increase, firewood of
existent Consumer Price Index (1 CPIt *) & (2 CPIt-1) have been used. Moreover,
economic increase rates are calculated from the deviation of firewood of Cross
Price index and from firewood rates of rising prices.

34

Model Specification and Estimation Technique

We used the following linear regression equation formula: The main purpose of
the simple linear regressions was to uncover the general behave of the increasing
function relating the rising price rate and economic increase.
GDPGt 1CPI t 2 CPI t 1

Where
GDPGt Gross domestic product growth over a year
& Perameters

CPI t Current years consumer price Index

CPI t 1 Trailing years consumer price Index

The first regression equation formula described that common linear framework.
Even so, in above discussion we can easily described with the help of recent
studies that Threshold impacts are an accompaniment with a rising price rate
increasing some important value or below some important values according to
Smith, Boyd & Levine. In different words we can say that the relationship

35

between rising price and economic increase does not follow one specific pattern.
In this empirical framework threshold effects with estimation and inference
related econometric issues. To conduct correct results it is important to find and
create suitable methods. In this current important phase we explain a thoughtful
and nontechnical concept of the methodology. In this equation formula the main
two variables Log of Consumer Price Index (CPI) and Consumer Price Index
(CPI) calculate the level of rising price on Gross Domestic Product (GDP)
increase. The calculated solution from the simple regression framework (1) is
some consistent, extent with the existing condition.

36

RESULT AND DISCUSSION

Gdp growth shows the up and down trend from 1951 to 2010.

37

Cpi (consumer price index ) shows the up ward trend from 1951 to 2010.

SUMMARY OUTPUT
Regression Calculations
0.040735
Multiple R
816
0.001659
R Square
407
Adjusted R
0.033995
Square
614
2.488505
Standard Error 731
Observations
59

Analysis of Variance( ANOVA)

Regressi

df
2

SS
0.5764

MS
0.2882

38

F
0.0465

Significanc
eF
0.9545626

on
Residual

56

Total

58

21
346.78
9
347.36
54

1
6.1926
61

41

69

Source: This study

Explanatory power of model is as low as 0.16% which is highly insignificant. As

ANOVA table shows very low F statistics of 0.04 (cutoff of F statistics is 4).
Moreover the F statistics also reflect that the model is insignificant.

Interce
pt
CPI
CPI_1

Coefficient
5.150097
504
0.032026
099
0.035030
2

Stan- Error
0.4334986
83

t Stat
11.880
31

P-value
6.18E17

0.1062595
04

0.3013
95
0.2980
4

0.7642
3

0.1175345
12

0.7667
74

95%
Lower
4.281695
297
0.180837
26
0.270480
11

95%
Upper
6.018499
71
0.244889
46
0.200419
72

Source: This study

The insignificance of individual variables is also observed from t statistics which

are 0.3 and -0.29 respectively (cutoff of t is 2). Only intercept is significant which
is further validated by p-value as both the coefficients p-value are not less than
0.05.

Equation # 2 Estimation:
GDPGt CPI t

This equation shows the single variable Consumer price index at time t (CPI t) to
estimate the growth in GDP.
39

Regression Calculation
0.0087
Multiple R
07
7.58ER Square
05
Adjusted R
0.0174
Square
7
Standard
2.4685
Error
36
Observations 59

Analysis of Variance( ANOVA)

df
Regressi
on

Residual

57

Total

58

SS
0.0263
33
347.33
91
347.36
54

MS
0.0263
33
6.0936
68

F
0.0043
21

Significanc
eF
0.94781701
4

Source: This study

R-square shows goodness of fit which is very low which means overall model is
not fit. ANOVA table shows that very low F calculation of 0.004 (cutoff of F
statistics is 4). F statistics also indorses that the model is insignificant.

Interce
pt

Coefficient
5.126038
24

StanError
0.422498
322

t Stat
12.132
68

P-value
1.98E17

CPI

0.000412
49

0.006274
791

0.0657
37

0.9478
17

95%
Lower
4.279999
948
0.012152
57

95%
Upper
5.972076
53
0.012977
54

Source: This study

The insignificance of individual variable is also observed from t statistics which is

0.065 which is less than 2 and it is further validated through p-value which is not
less than 0.05. Only intercept is significance

40

CONCLUDING REMARKS
The main purpose of this empirical according to the periods of yearly information
1951-2010 we calculate the Impact of rising price on economic growth in
Pakistan. After study all the information we found there is no impact on growth of
rising price in Pakistan. This phase is very important for Pakistan rising price rate
level because is this document we find out a point of view gradually coming into
being a relationship between 2 variables rising price & economic increase in
Pakistan. In this condition linear regression test methodology employed to define
the relationship about rising price and economic increase. Examine the
relationship between two variables rising price and economic increase we used
Consumer price index (CPI) as a power of attorney document for rising price and
the Gross Domestic Product (GDP) as a power of attorney document for
economic increase. This important information is belong a period from 19512010. Using the regression framework I obtain the results of stationary test. The
null possibilities being that there are cellular levels but neglect to decline at first
difference inculpating that the things were found insignificance. So neglect to
refuse the possibility.
As this study resemblance to Manzoor Hussain (2005), his finding is same that the
result is insignificant so that there is no threshold level of inflation in Pakistan so
far as I found that insignificancy in result.
According to Mubarik description the threshold rate of level rising price is
9percent in Pakistan. Even so, a rise in interest rates is often contemporaneous
41

with an increase in rising price is found to have important positive effects on

economic increase up to 5% rising price level rate. In addition with this point, the
impact a rise in interest rates is often contemporaneous with an increase in rising
price on increment

is positive but influence.After drawing reasoning and

conclusion recommdation is to keep in Pakistan rising price within the range of 4

to 6 percent. So it may be useful for capable of being maintained economic
increase. Similarly we can study the same Singhs idea 2003 addition. He
describes the rate of targeting rising price range in India is 4 to 7 percent. So here
we can say that rising price in Pakistan is subject about the demand, supply and
stocks it is not a relating to or involving phenomenon completely. To keep rising
price in control in Pakistan it should calls a policy through Central Bank of
Pakistan (CBP).

42

REFRENCES
R.Barro Vol 78(1996). Inflation and growth, Reserve Bank of St. Louis
Review.
Robert J Barro Cambridge press (1997) Determinants of Economic Growth: a
Cross Country Empirical Study.
M.Bruno, and Easterly,( 1998) Vol.41Inflation crises and long-run growth,
Monetary Journal.
S.Fischer,(1993) Vol.32 The role of macroeconomic factors in economic
growthMonetary Economics journal.
Sahay Ratna, Stanley, Fischer, and Vgh, (1996) Vol.10, Stabilization and
Growth in Transition Economies: The Early Experience, economics journals.
Bruce, Hansen (1999), Vol.93 econometrics journal. Threshold Effects in NonDynamic Panels Estimation, Testing and Inference.
Hansen, Sample Splitting and Threshold Estimation, May (2000), Vol. 68
Chowdhury and A Hussain, (1996) LONDON. Monetary and Financial Policies
in Developing Countries.
Khan, A., 2000.FEDERAL RESERVE BANK OF PHILADELPHIA, February
(2000) The finance and growth nexus. Business.
S. Senhadji and, Mohsin S khan. (2000) IMF Working Paper Threshold Effects
in the Relationship between Inflation and Growth.
Renelt. D and R.Levine,( 1992)American economic review ,vol.82 A sensitivity
analysis of cross-country growth Regressions.
43

Yasir Ali Mubarak (2005) volume 1, no 1 (2005) Inflation and Growth: An

Estimate of the Threshold Level of Inflation in Pakistan State Bank of Pakistan
Research Bulletin.
K. Chowdhury and Kearny, (1997).Vol. 29 Inflation and economic growth: a
multiCountry empirical analysis
Michael, sarel, (1996), Nonlinear Effects of Inflation on Economic Growth,
IMF
Papers, vol 43(march) International Monetary Fund.
Kaliappa K and K. Singh. (2003) Journal of policy Modeling. The InflationGrowth Nexus in India: An Empirical Analysis Vol .25.
International Research Journal of Finance and Economics
Vol. 17 (2008) EuroJournals Publishing, Inc.
Alexander Bick. Department of Economics,Threshold eects of Rising Price on
economic Increase in developing countries
Alexander Bick Department of Economics, Goethe University Frankfurt.
Working Paper Series: WP 0604Rising Price and Economic Increase in
Bangladesh:
Ahmed Shamim and Golam Mortaza December ,(2005) Policy Analysis Unit,
Research Department, Bangladesh Bank.
Rising Price on Economic Increase: Evidence From Four South Asian
Countries
Mallik Girijasankar and Chowdhury Anis Asia-Pacific Development Journal, Vol.
8, No. 1, June (2001) Indian
Economic Service.
Rising Price on Economic Increase in India An Empirical Analysis .Prasanna
44

V Salian1,Gopakumar. K2
Manzoor Hussain. October 2005, Rising Price and Increment: Estimation of
Threshold Point For Pakistan.Economic Policy Department, State Bank of
Pakistan.
Xiao Jing.(2007)The Relationship between Rising Price and Economic Increase
of China.

Gokal Vikesd & Hanif Subrina.Relationship between Rising Price and

Economic Increase.
Working Paper Vol. 4 December 2004 Economics Department Reserve Bank of
Fiji Suva Fiji.
MinliVol 14 (2005).Rising Price and Economic Increase: Threshold Effects and
Transmission Mechanisms
Department of Economics, University of Alberta.
Chien-Chiang Lee and Swee Yoong Wong Vol.3 no.2(2010), National Chung
Hsing University Journal :Sustainable Development:
Rising Price and Economic Increase in Nigeria Economic department.

45

APPENDIX
RESIDUAL OUTPUT
Observatio
n
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30

Predicted GDP
Growth
5.40966923
5.375763562
5.365025494
5.368555743
5.363334031
5.377904791
5.399285115
5.372069023
5.372515079
5.336530274
5.318532279
5.318054904
5.306114643
5.264828627
5.227170583
5.176989977
5.108163708
5.076927116
5.046786647
5.128253878
5.278901989
5.21439201
5.028316518
4.684031472
4.810484597
5.305675899
5.211733901
5.136762926
5.04528812
4.909348436

Residuals
-7.2096692
-3.6757636
4.83497451
-3.3685557
-1.863334
-2.3779048
-2.8992851
0.12793098
-4.4725151
-0.4365303
0.68146772
1.8819451
1.19388536
4.13517137
2.37282942
-2.07699
1.69183629
1.42307288
4.75321335
-3.9282539
-2.978902
1.58560799
2.47168348
-0.7840315
-1.5104846
-2.5056759
2.4882661
0.36323707
2.25471188
1.49065156

46

RESIDUAL
OUTPUT

Observation
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59

Predicted GDP
Growth
4.986919241
5.230122897
5.172356402
5.101921824
5.04391094
4.99572828
4.9373396
4.833705186
4.713272626
4.579791295
4.774154681
5.21469871
5.108008203
4.97240905
4.81978924
4.660808489
4.501411801
4.380753567
4.290647045
4.21437146
4.619359754
5.306156493
5.272613671
5.207190193
5.117518486
5.029539172
4.917318014
4.71085618
4.449916928

Residual
s
2.613081
1.569877
-1.17236
3.598078
1.356089
0.804272
1.46266
-0.03371
-0.11327
1.020209
2.925845
-2.9147
-0.60801
-0.87241
1.780211
-2.96081
-1.00141
-0.18075
-0.39065
-2.21437
-1.51936
-0.60616
2.227386
3.79281
0.682482
1.770461
2.282682
-6.31086
-0.64992

47

Dependent variable: GDP growth.

Independent variable: CPI & log CPI
Method : regression model
Observations : 60

Regression Calculations
0.040735
Multiple R
816
0.001659
R Square
407
Adjusted R
0.033995
Square
614
2.488505
Standard Error 731
Observations
59

Analysis of Variance( ANOVA)

df
Regressi
on

Residual

56

Total

58

Interce
pt
CPI
CPI_1

Coefficient
5.150097
504
0.032026
099
0.035030
2

SS
0.5764
21
346.78
9
347.36
54

MS
0.2882
1
6.1926
61

F
0.0465
41

Stan- Error
0.4334986
83

t Stat
11.880
31

P-value
6.18E17

0.1062595
04

0.3013
95
0.2980
4

0.7642
3

0.1175345
12

48

0.7667
74

Significanc
eF
0.9545626
69

95%
Lower
4.281695
297
0.180837
26
0.270480
11

95%
Upper
6.018499
71
0.244889
46
0.200419
72

Dependent variable: GDP growth.

Independent: CPI.
Method: regression model.
Observations: 60

Regression Calculation
0.0087
Multiple R
07
7.58ER Square
05
Adjusted R
0.0174
Square
7
Standard
2.4685
Error
36
Observations 59

Analysis of Variance(
df
Regression 1
Residual
57
Total
58

Interce
pt

Coefficient
5.126038
24

ANOVA)
SS
0.026333
347.3391
347.3654

StanError
0.422498
322

MS
0.026333
6.093668

t Stat
12.132
68

49

F
0.004321

P-value
1.98E17

Significance F
0.947817014

95%
Lower
4.279999
948

95%
Upper
5.972076
53

CPI

0.000412
49

0.006274
791

0.0657
37

GRAPHICAL REVIEW

50

0.9478
17

0.012152
57

0.012977
54

51