“Unraveling the Complex Web: Exploring the Interplay of Inflation Rate, ER, and EG in Pakistan”

Abstract

This paper explores the relationships between exchange rate (ER), inflation, and economic growth (EG) in Pakistan, utilizing time series data from 1980 to 2022. The study employs various econometric techniques, particularly the autoregressive distributed lag model, to explore both the short-run and long-run dynamics between these macroeconomic variables. ER depreciation has a significant positive impact on EG. This indicates that a weaker domestic currency can potentially boost EG by making exports cheaper and more competitive on the global market. Inflation also shows a significant positive impact on EG. However, the relationship between inflation and EG is nonlinear. At low levels of inflation, the relationship with EG are positive; suggesting that moderate inflation can spur economic activity by promoting outlays and investment. At high levels of inflation, the relationship becomes negative, indicating that excessive inflation can harm EG by creating uncertainty and eroding purchasing power. Investments in education, infrastructure, and healthcare services can enhance productivity and EG, thereby supporting a stable ER and moderate inflation.