Determinant of Inflation in Pakistan: An Econometrics Analysis, Using Johansen Co Integration Approach

Abstract

The main object behind the study is to explore the long run and short run dynamics of inflation in case of Pakistan. For this purpose study used annual data 1971 to 2012. Johansen co integration approach is used to check long run equilibrium while ECM (Error Correction Model) is used to check short run dynamics. The result highlighted GDP, M2, energy crises, import and current government expenditure, output gap and adaptive expectation create inflation while development expenditure negatively corrected with inflation. The study concluded that in Pakistan demand side and supply side inflation persist.

Key Word: Inflation, Long run and Short run