A Dynamic Cointegration Analysis of Money Supply, Inflation and Economic Growth in Pakistan

Abstract

The understanding of the dynamic and complex interdependence between the money supply, inflation and economic growth needs extraordinary consideration for devising the effective policy formulation to attain the desired macroeconomic goals of the country. Therefore this study is attempted to deeply investigate the interconnecting behavioral patterns of money supply, inflation and economic growth in case of Pakistan. In order to examine the short run and long run nexus between the variables, the present study acquired the time series data over the years from 1990 to 2022. An execution of Johansen Cointegration technique along with Vector Auto regression Analysis (VAR) revealed the existence of long run cointegration between the variables. The results of the study disclosed that rising trends of inflationary trends are dominantly destructive for the economic growth of the country. The findings from the study also explain a proportionate impact of money supply towards the rate of inflation in Pakistan. This study also suggests that an upsurge of economic growth rate is a vital element to discourage the climbing prices in the country.