Does growth led inflation hypothesis & locus critique exist in Pakistan? A time series study

The impact of economic growth, intemational trade, unemployment and money supply on inflation has been subject to a long debate both in developing and developed countries. The advocates of economic growth, intemational trade and easy monetaq policy are of the view that inflation increases because of increase in the economic growth international trade and money supply. However, the existing literature sheds light on the inverse relatiomhip between unemployment and inflation. Therefore; th~sA c l e investigates the impact of economic growth, trade liberalization, unemployment and broad money supply on inflation for Pakistan for the data set from 1976-201 0. This present study applies Augmented Dicky Fuller (ADF) and Phlllip Penon (P-P) tests to investigate unit root problem, Autoregressive Distributed Lag Model (ARDL bounds testing approach) to test existence of co-integration among inflation and its factors, Fully Modified Ordinaq Least Square Method (FMOLS) to compute long run dynamics, Enor Conection Mechanism (ECM) to examine short run dynamics and Granger Causality Test to explore the drection of causality among the variables of th~st udy. The empirical results demomtrate that only growth led inflation hypothesis works in long run, whereas, trade and unemployment led inflation hypothesis works for Pakistan both in long run and short run time spans. Economic growth and inflation have trade off in short run but money supply and inflation have trade off both in short run and in long run time spa. It is also evident that there exists unidirectional relatiomhip that runs from economic growth to mflation; kom trade to economic growth and from economic growth to money supply in the short run, but, money supply and inflation have bidirectional relationship between them in short run. Besides this, the study finds the existence of long run causality among inflation and its factors. Moreover; it is concluded that there prevails joint causality among inflation, economic growth, unemployment and money supply in Pakistan.