Macroeconometric Analysis and Modelling of Inflation, Unemployment, Investment and Economic Growth in Pakistan

Abstract

This study focused on economic growth, inflation, unemployment and investment in Pakistan for the period 1990-2017. Inverse association between inflation and GDP has been observed in inflation model-I. Higher the GDP is expected to lead to a reduction in inflation. The M2 (money supply) is significantly positive that means that the increase in money supply will increase inflation. Imports in Pakistan are another potential factor that propels inflation. Population growth has the expected positive but insignificant coefficient. Increase in value-added by both agriculture and industry can help reduce the army of unemployed youth coupled with relentless reduction in population growth. Domestic credit and savings coefficients are positive in the investment model. In the economic growth model, except imports, rest of the coefficients are positive and significant suggesting the significance of human resource development coupled with investment and value-added by both agriculture and industry. Four modest models dealing with (inflation, unemployment, investment and economic growth) were proposed and explained. OLS, FMOS and GMM estimated the models. Being based on time series data, Cointegration and Granger Causality were also done. The models were also subjected to specification and diagnostic tests. These tests largely supported the models. Simulation and graphs showed that the predictive ability of the models was reasonable. Since Model-I Model-III and Model-IV did not show Cointegration, these models were examined for Granger Causality. F-statistics was significant for money supply and budget deficit in model-I meaning that these variables caused inflation and it was significant for exchange rate in Model III, implying that exchange rate affected investment. Similarly, agriculture –value added caused economic growth. GMM results on the average were not better than OLS results. Endogeneity test for all the four models was insignificant suggesting that the regressors were exogenous. xiv Key Words: Savings, Investment, inflation, unemployment, economic growth, Pakistan Jell Classification: C50, C51, E2, E27