INDUS INSTITUTE OF HIGHER EDUCATIONKARACHI

“Impact of inflation on economic growth :an overview on Pakistan”

[FINANCE THESIS]

[IQRA IRSHAD]

[B.B.A :08-A]

SUPERVISED BY : SIR NAWAZ AHMED

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Turnitin Originality Report“Impact of inflation on economic growth: an overview on Pakistan”

ByIqra Irshad (ID- 5-2008 BBA-08A)

Processed on 07-Feb-2012 10:26 PKT ID: 227954564 Word Count: 7336

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________________ ______________ ____________________Javed Iqbal Nawaz Ahmed Usman Ali

Focal Person Thesis Supervisor HODPlagiarism Services Business Administration

IIHE

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Faculty of business administration

INDUS INSTITUTE OF HIGHER EDUCATION

Karachi

CERTIFICATE

I am pleased to certify that Ms Iqra Irshad D/o Mohammad Irshad has

satisfactorily carried out a research work, under my supervision on the topic of

“impact of inflation on economic growth:an overview on pakistan”.

I further certify that her distinctive original research and her thesis is worthy of

presentaton to the faculty of management sciences, INDUS INSTITUTE OF

HIGHER EDUCATION Karachi for the degree of B.B.A (FINANCE).

SUPERVISOR: _________________________

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ACKNOWLEDGEMENT

I would like to thank Mr Nawaz Ahmed – my supervisor who has given me

Many useful comments related to my topic. After his guidence I am able to complete my thesis through his step by step support for my research work.Also I would like to thanks to Mr Javed Iqbal who checked my work on short term notice and appreciat my work by both of persons also a lot of detailed and valuable comments on this thesis. The same appreciations will be for members from my thesis group and for the teacher and members from my groups in course.

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DEDICATION

This thesis is dedicated to my parents who introduced me to the joy of reading from

birth enabling such a study to take place today.

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TABLE OF CONTENTS

Abstract………………………………………………………. 5

SECTION

1. Introduction…………………………………………………. 62. LiteratureReview……………………………………………. 142.1 empirical review…………………………………………….153. Hypothesis………………………………………………….. 304. Variables……………………………………………………..305. Model and frame work……………………………………… 306. Methodology……………………………………………….. 316.1 model specification and estimation technique…………….. 337. Results and discussions…………………………………….. 357.1 Data and summary output………………………………..... 368. Conclusions …….………………………………………….. .38

TABLES

REFERENCES ………………………………………………. 40

APPENDIX……………………………………………………. 43

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ABSTRACT

The thesis is to find out the impact of inflation on economic growth in Pakistan by using the

data from 1950 to 2010. This thesis uses the regression linear model to find out the impact

on gdp growth. This study is basis on manzoor hussain who,s findings are insignificant and

also similar to singh (2003) which recommands that the rising prices within 4 to 6 % is

favorable for pakistan and central bank should keep the policies favorable for the growth.

As my findings+ are insignificant that there is no impact of inflation on economic growth.

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INTRODUCTION:

Last many year research work on economics has described many reasons of

relationship between rising price and economic increase. One major purpose of

this research work after identify the rising price is bad thing to economic increase

get the week points or effected points. Some research define a threshold rate of

rising price above the economic increase is negative and significant due to rising

price effects, while the positive level of economics increase is below level of

threshold rate of rising price.

Even so, as the important results by the previous research work on many different

purposes across the countries these results are shows that when the rising price is

effect on economic increase there is no general agreement over the point.

This document described the major point is that using a regressing formula there

is many possible reasons available of inflationary effects on the relationship

between economic increase and financial sector development. In general

macroeconomics holds that to promote economic increase the combination of low

rising price and financial development is a common factor without this

combination we cannot promote economic increase. The interesting and debate

article is the question of nature connection between financial development,

economic increase and rising price. This is also true that this topic and the

relationship between these three variables is already using in debates and research

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point of view. In Large general agreements about connects of these three variables

economic increase, rising price and financial development has been reached.

Commonly the concept of long term and medium term reaction of rising price,

product increase and reducing investment on economic increase is negative.

The major aim of policymakers is low rate of rising price if rising price is a main

blockage of promoting economic increase, Even so what is the target level of

rising price is? How rising price low level is positive impact on financial

development and on economic increase? In the other way it is possible to obtain

the threshold level of rising price point if a non-linear relationship found between

rising price and economic increase, and what is the sign of relationship between

rising price and economic increase would controlled. Fischer was first identified

the non-linear relationship, he found that at low level of rising price rate the long

term relationship between rising price & economic increase is positive, and at

high level of rising price rate it become negative.

Accordingly the very deep study about the non linear economic increase and

rising price, there are many possibilities and factors that explain the existence of

rising price threshold effects on the relationship between economic increase and

financial development, nowadays the deep study and theoretical research about

relationship of economic increase and rising price suggests that promoting the

economic increase the financial market playing an important role. Thus we can

say that financial market activity goes down and up if changes in the rate of rising

price, it is possible that some changes would have long term real activities

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implication. Moreover these theoretical studies provide strong evidence to prove

that financial developments promote economic increase under the moderate and

low rate of rising price. Causality test tells the relationship about rising price and

economic increase causality. According to Okuyan and Erbaykal there is casualty

found in relationship of rising price to economic increase and also tells there is no

causality connection found between economic increase and rising price.

On the opposite in nature, financial development dose no produced any type of

effect on economic increase under high rising price environment. The basic

reason of this situation is that in a rising price environments investment project

information flow and intermediates returns being used become less readily

available and unsure of himself and his future. Suppress a nascent uprising

economic development due to information costs and rising price increases

transactions. High rising price conditions can put out of one's consciousness

financial intermediation by grinding something down the unimportant of money

assets and policy decisions become a cause distort the financial structure.

The following accepted customs and proprieties view in microeconomics holds

that changes in the rate of rising price by nature. These changes in the long terms

do not affect real activity. Even so the expert view of solution terms that even in

the long term period the rising price high rates can have made a place for

themselves under the most untoward conditions for real economic increase. In

these days the major topic amongst economists is that the problem of aggregate

economic performance and some individuals is high rates of rising price. Even so

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there is a very few general agreements about the characterized by perfect

conformity to fact or truth between relationship economic increase performance

and rising price and by the method in which rising price effects on economic

increase. The effects of long term activity increase in rising price rates is very

alarming point. The general agreement about the an opposing direction effects of

rising price on real economic increase show only a some part of the complete

picture. In some previous researches has focused on the non-linear relationship

between rising price and economic increase. The first condition is at lower rate of

rising price in this condition the relationship is not important in effect or even

positive on economic increase but at higher rates of rising price has important

negative effect on economic increase.

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What level of inflation is harmful to growth?

Theory

Basically economic research theories results based on about the outputs of

economic increase to rising price. These economic theories are very useful

because the concept of these theories based on observed hypothesis. Historically

in the missing word meaning of term “Continually recurring to the rising prices”

the early researches about the rising price and economic increase were built on

cyclical results, continually recurring to the rising prices is regarded as a post

world war 2 reasoning. In advance of then, rising price rounds were followed by

turn of deflations. Rising price act like a lazy dog that is not doing anything like

upward level and downward level trend. The rising price level doing nothing but

it is stable in a exceptional level unless and until there is any perturbation.

Thenceforth, the rising price moves to another level at which rising price

determines. Theory, thus being searched for account a positive correlation

position between rising price and economic increase. The aggregative supply and

aggregative requirement model also tells that positive behavior of rising price and

economic increase, where the rising price effects on economic increase and

economic increase is increased. Even so, in the 1970s the concept of stagflation

rise hump and the credibility, of the positive connection was questioned. At that

time Phillips Curve relationship appeared and widely accepted. In this reason the

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rate of rising price very high level and also the Phillips Curve relationship is a

clue of low and negative output economic increase.

In this document the coming after sub-sections we spend some time classic

Endogenous increment possibilities, Neo-classical, Monetarist, Neo-Keynesian

and Keynesian, every component playing an important role to the economic

increase and rising price relationship. Classic economics recollect supply side

possibilities if the nation’s economy is to grow the supply side theories

underscore the need for bonuses to save and devote, joined to the land capital and

exertions. Under the Ad-AS framework the Neo-keynesian and Keynesian theory

give some important and bit by bit framework for linking rising price and

economic increase. Monetarism explain the Quantity possibilities, and playing in

important role of pecuniary increase in characterizing rising price, Endogenic &

Neo-classical increment theories searched for the effects of rising price on

economic increase through its behavior on capital collection and investment.

This research is present the important and useful difference among the solutions

of theoretical studies, in the different countries the ration of rising price on

economic increase is different. Even so, some theoretical results was quite large

which show some results about the threshold rate of rising price according

different countries. For example in India Mr. Singh show some important results

on threshold level of rising price and Mr. Mubarik show useful result about

threshold level of rising price in Pakistan and he also said the threshold level of

rising price is 9 percent in Pakistan. Some other researches about threshold level

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of rising price for both types of countries like growing and developed. Even so,

Senhadji’s and Khan Works on threshold level of rising price for both types of

countries like growing and developed. They said threshold level range 7-11

percent for the growing countries including Pakistan. jing xiao find that con-

integration framework enclosing correlation matrix and granger casualty test tell

the situation of relationship between rising price and economic increase. The

rising price results show positively on economic increase relationship in the long

term period.

Rising prices is importantly correlated utilizing the economic increase rate. The

simple regressions panel indicates or described the relationship between three

variables rising price unevenness economic increase and rising price. Now it is

possible with the help of increment accounting model to spot that main grooves

through which rising price comes down economic increase.(fischer).

According to (lee and Wong) that rising price threshold occurs in the connection

between financial Development and increment. Now we can say that some

changing in the rising price directly effect on the connection between two

variables financial development and increment.

Consequently, geomorphologic upgrade in rising price threshold level should be

taken when constructing and prediction models of economic increase.

Pakistan for the period 1973-2005 describes the threshold level of rising price in

Pakistan. In the end of this survey the write finds that there is no any threshold

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level of rising price in Pakistan. Mubarik (2005) is the main person (director) to

find 9 percent of rising price threshold level in Pakistan and all other solutions.

This study also shows that there is 5 percent contemporaneous rising price is

found in Pakistan that is a positive impact on economic increase. Further study

shows that the impacts of contemporaneous rising price on economic increase is

good but also show some insignificants. After discuss all the requirements and

fundament of the inference reaped from the survey we easily say that the

acceptable range of the rising price in Pakistan 4-6% this rang of rising price is

helpful for maintain economic increase. Similar idea described in India by Singh

in 2003 that the target rising price range is 4-7% suitable in India for economic

increase. In Pakistan the rising price is the subject of supply and demand shocks.

In Pakistan Central Bank of Pakistan should keep the rising price in rang.

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LITRATURE REVIEW

Jing Xiao

According to Jing xiao the relationship between economic increases and rising

prices of china. Previous literature cannot obtain any unambiguous solution on

these problems. This research report will mistake rectification and employ con-

integration models attaching granger causality test and correlation matrix examine

the economic growth and rising prices relationship. This information is annual

time series from 1978 to 2007 of china. The long run rising prices solutions show

positively relate to economic increase relationship. When china develops

economy they must pay attention to price level. The cause of rising prices in the

short run period would be high speed increase of investment.

Raghbendra Jha and Tu Dang

According to annual information of economic increase and rising price variability

we see the results on both growing and modernized countries. The information of

1961-2009 period cover 31 modernized countries and 182 growing countries. We

obtain the following solution by five year coefficient of variation of rising prices

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In growing countries we suggest according to significant evidence that rising

price variability has show a negative impression on economic increase when the

rate of rising price surpasses 10 percent. In modernized countries the increase of

rising price is under control there is no any evidence to increase rising price.

Alexander Bick

This research paper described the relation between rising price and economic

increase confirms that the left out variable diagonal of received dialog models can

be economically significant and statistically.

This important investigation shows the result according to abstraction of Hansen’s

(1999) dialog box tolerance simulation that the relationship between rising price

and economic increase for growing countries. Doorstep ideas and Regression slop

both are discussed and these readily available for regressors the possible prejudice

of excluding and authorities intercepts.

Yasir Ali Mubarik

According to annual information from 1973 to 2000 we discuss the level of rising

prices in West Pakistan (la khan and senhadji 2001). After discuss all the

conditions and requirements of threshold model and finally its predisposition

results using information of rising prices and economic increase of home country

and after study we get following major points. We can define causality directions

from rising prices to economic increase and not other way around after causality

test. The red alert economic increase is raising prices and threshold model analyze

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9 percent recommends threshold rising prices level for economic increase. The

powerful solutions, obtain form indicates exact level of threshold rising prices and

validity of the model, this deeply research study indicates that the main reason of

economic increase is rising prices level below 9 percent. These results might be

providing best results in determining an optimal rising price target. All the same,

these results does not indicate that economic increase is low the level of rising

prices.

Erman Erbaykal and H. Aydın Okuya

In this survey document writer defines Turkey analyze in our country the

relationship between economic increase and rising price in the periods of 1987

and 2006. In both periods turkey analyze with the help of Bound Test developed

Pasaran et al. (2001) these test show the results of long term relationship between

these two components economic increase and rising price and coming after the

test result relationship between two rows of the macrocosm of co-integration

collaboration. There is no any result found about numerical significant long term

relationship with formed ARDL models and there is also short term numerical

significant relationship and negative results found. Causality test represent the

causality relationship between two rows. According to Causality test there is no

causality relationship found between economic increases to rising price if

causality relationship found it has been raising price to economic increase.

Monaheng Seleteng

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This survey tries to explain according to quarterly time-series information for the

periods 1981 to 2004 that rising prices optimal levels perform the main role for

economic increase in Lesotho, we can easily converted all annual information to

quarterly time-series information by using Three dimensional interpolation

technique engrafted in Eviews econometric software . These quarterly time series

information show 10 percent optimum amount of rising price based on rising

price is detrimental for economic increase. According to this result any rising

price rate above this optimum level become a reason of economic increase.

Manzoor Hussain

In this document writer tries to explain the primary thing is that to using annual

information of Pakistan for the period 1973-2005 describes the threshold level of

rising price in Pakistan. In the end of this survey the write finds that there is no

any threshold level of rising price in Pakistan. Mubarik (2005) is the main person

(director) to find 9 percent of rising price threshold level in Pakistan and all other

solutions. This study also shows that there is 5 percent contemporaneous rising

price is found in Pakistan that is a positive impact on economic increase. Further

study shows that the impacts of contemporaneous rising price on economic

increase is good but also show some insignificants. After discuss all the

requirements and fundament of the inference reaped from the survey we easily

say that the acceptable range of the rising price in Pakistan 4-6% this rang of

rising price is helpful for maintain economic increase. Similar idea described in

India by Singh in 2003 that the target rising price range is 4-7% suitable in India

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for economic increase. In Pakistan the rising price is the subject of supply and

demand shocks. In Pakistan Central Bank of Pakistan should keep the rising price

in rang.

David Drukker

In this survey writer described a question is “super-neutrality of money”. A

currently theoretical solution presents threshold model alternates of super-

neutrality.the theoretical solution show that the threshold level of rising price

more than the effect of rising price on long term increase changes. We use new

economic methods to obtain the solution and some other results in non-dynamic,

panel-information model and fixed-effects that have threshold effects. The

solution describes that rising price has a nonlinear effects on economic increase.

Our solution and theoretical work in which describes that rising price effects on

economic increase. The coefficient sign on investment is difference between the

industrialized and non-industrialized subsamples, and the coefficient on openness

has a positive sign are provide interesting solutions.

In the future research our aim we applying threshold techniques will causes the

estimate co-efficient on openness to agree with standard hypothesis.

Girijasankar Malik and Anis Chowdhury.

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In this important research document, the authors using annual information t o

describes the relationship both long term and short term dynamics of the rising

price and economic increase of four South Asian Countries. In this document the

authors used error correction and co-integration models to explain the long term

and short term relationship of economic increase and rising price. In this research

the main objective of the document is to analyze the relation between economic

increase and rising price if there is any relation between these two variables, it’s

by nature and no other reason for this relation exit. After study all important and

useful requirements authors are found two main results about economic increase

and rising price, 1. The relationship between rising price and economic increase

are positively related. 2. The Changing in growth rates after changing in inflation

is bigger than that increase to changes in rising price rates. These results describe

some important points and these points have important policy implications. The

helpful advice to reduce economic growth our main and very important step is

attempts to reduce rising price to a very low level. Even so, we can easily

attempts to achieve faster economic growth may be the inflation rate are becomes

unstable. Thus, these points and ups and downs are on a knife-edge.in this

document the main challenge for the authors is to search a growth rate level which

is stable rising price rate continuously if authors can’t find the level of economic

growth than first beat inflation then control the faster economic growth rate

levels. The basic thing of economic increase is rising price and as per ruled by

Bruno and Easterly (1998) this is very tough condition that the economic growth

rate may speed the rising price rate and take it down.

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Shamim Ahmed and Md. Golam Mortaza

This research paper explores the present condition between rising price and

economic increase in Bangladesh. Some basic assessment has been adopting

throughout the error correlation and co-integration models. Further more in this

paper explain the economy’s threshold level of rising price and explores an

interesting policy issue about economy’s threshold level of rising price. The deep

study clues pointing that there is a negative long term statistical importance

relationship for a country between rising price value and economic increase and

also indicates negative along term relationship statistically importance between

CONSUMER PRICE INDEX and real GROSS DOMESTIC PRODUCT.

Authors have mentioned in this paper about situation of rising price value and

economic increase in Bangladesh in late 1990s and they said Bangladesh was

already on the turning point (from positive to negative) of rising price value and

economic increase relationship. Authors also define the level of threshold if rising

price increases this level than affect on economic increase and the recommended

6 percent threshold level of rising price.

These solutions show some important policy that applies on both development

cooperators and domestic policy makers. The first thing about these policy that

that rising price rate is not listed in the salaries and wages. The rising price will

effect on buying force and an improve cost of living. Second thing is that country

continuously perform tasks to balance the credit requirements by the private and

public sectors against both balance of payments pressures and inflationary.

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According to contractionary monetary policy 11 it is not always possible to

monetary authority to maximize the nominated interest rate above the expected

rising price rate. That is way the monetary authority is work to reduce rising price

using an alternative methods and procedures.

Some points are in order. For Example in this context of Bangladesh, the solution

provided in this documents do not address the following important issues.

1. It is not possible to say that how the economic increase rate will show the

results and the rate

Of rising price rises. But the rising price remains within the threshold level.

2. The greater rising price uncertainty cause is higher rising price and what is the

relationship between rising price uncertainty and rising price.

3. Whether rising price directly or indirectly involves in economic increase.

4. What is the main purpose of high inflationary pressure?

Vikesh Gokal and Subrina Hanif

According to Gokal and Subrina the main purpose of the document was to explain

the basic and significant relationship between rising price and economic increase.

According to deeply study about rising price and economic increase and

hypothesizes, the survey show some useful and very important perceptiveness

behave of rising price & economic increase like magnitude. In Michael report he

found after 8 percent structural break rising price badly affected on increment.

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Khan & sendadi found that threshold rising price level for developing countries

are 11-12 percent and for industrial countries at 1-3 percent. These results playing

important role to fix the main benefit of maintain rising price stable and supply a

useful penetration into the relationship between two components. Looking

specifically rising price performance between the two variables is not surprising

under the heavy duty link, given the influence rising price current topical cream

construction of the economic system and factors. Negative weak link shows only

correlation co-efficient and operate from economic increase to rising price shows

causality.

According to some other surveys to importance of maintain low rising price

provide some important points for Fiji policymakers in order to foster higher

economic increase.

Chien-Chiang Lee and Swee Yoong Wong

According to Huybens and smith, Gylfason and Herbertsson and Bose rising price

will effect on financial market through real economic activities. Same results are

produce for American countries by Gregorior and Guidotti. When American

countries faced in 1970s and 1980s high rising price rate, financial development

retarded economic increase. The main purpose of this study investigates the

relationship of three variables for Japan & Taiwan and these three variables are

raising price, financial development and economic increase. Toward investigate

the relationship of these three variables, to investigate the effects of possible

rising price on remain two variables relationship between financial development

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and economic increase; we employed the TAR approach reduced by Tong &

Hansen. After investigate we find that there is one rising price threshold value

condition in Taiwan and two rising price threshold value conditions in Japan.

The estimation results of processing on annual increase rate of rising price and

exploring the effects of financial development on economic increase under unlike

rising price routines that when the rising price level of threshold below

7.25percent and higher than 7.25 percent than the financial development may

upgrade economic increase for Taiwan and financial development will not

produce any effect on economic increase respectively. Accordingly financial

development upgrades economic increase under low level rising price. In Japan

the deeply study results show that when the level of rising price of threshold is

below 9.66 percent than financial development show some useful effect on

economic increase. However, when the rising price above threshold level

financial development is prejudicious to economic increase. In the end of this

document the conclusion that Japan’s rate of rising price is low or temperate when

the financial development will promote economic increase can be established and

we find this result with the help of Huybens and Smith, Bose, and Rousseau and

Wachtel. In Taiwan and Japan the guessed result obtain in this study that rising

price threshold occurs in the connection between financial Development and

increment. Now we can say that some changing in the rising price directly effect

on the connection between two variables financial development and increment.

Consequently, geomorphologic upgrade in rising price threshold level should be

taken when constructing and prediction models of economic increase for Taiwan

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and Japan.

Minli

Now a day’s economists believe that high rates of rising prices is a cause of many

“problems” not just for on problem it is a reason of many problems. but for mass

economic interpretation. Even so, very low range of agreements available about

the prices relationship between rising price & economic increase behavior and

environment by which rising price effect on economic increase,

The first portion of the document by the help of increase expenditure formula &

the increase accounting formula explain the effects of the rising price on

economic increase performance in both type of growing and developed countries,

the solution supported the nonlinear relationship between rising price and

economic increase. In further both types of countries growing and developing

countries show different types of reactions of nonlinearity between the rising

price and economic increase relation.

In the growing countries, the information about rising prices and economic

increase shows that two threshold available in the function relating rising price

and economic increase. The first level of threshold was showed 14 percent, &

second level of threshold was showed 38 percent. In the first threshold level the

rate of rising price is low similarly the effects of rising prices on economic

increase are positive and acceptable level. In The level two rising price rates for

Moderate which are between the two threshold levels the effects of rising price on

economic Increase is negative and rate of rising price is very high. at exceedingly

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high rising price rate, the borderline shock of part rising prices on economic

increase lessens speedily but is stillImportantly negatively charged.

In the developed countries, there is one threshold is discovered and the it is very

important, the level of threshold is stronger to estimation suggests and model

stipulations and this important threshold level is discovered at 24 percent, Both

types of levels of threshold works are same in growing countries and developed

countries that is way the rate of rising price is below the level of threshold 24

percent. The main reason of negative economic increase is raising price while the

importance of this negative effects on rising price exceeds this level of threshold.

In this document define 2 levels of thresholds for both types of countries growing

and developed, the effects of both level on these countries are follows: in the first

level of threshold defines (what rising prices blocks increment, but subwoofer

which ever rising prices has no pregnant or even positive results on increase),

whereas in the second level of threshold (in this level defines the large amount of

drop in the marginal effects of rising price occur). Further in this document

explain nonlinearity effects on both types of countries (growing and developed),

and growing and developed countries have a different type of nonlinearity in the

rising price and economic increase relation.

For growing countries these researches show some useful and well define policy

implication. First define the range of marginal negative effects on moderate rising

price and the range is 14 to 38 percent is mentioned. We can reduce economic

increase by about 0.2-0.4 percent points if increase in rising price by 10 percent

27

point per year will effect on economic increase rate. This advice effect on long

term moderate rising price on increase will lead to a substantial negative effect on

economy’s performance.

Second important thing in this document for policymakers will not keep the rising

price level at 0 percent since the first level of threshold of 14 percent does not

impede & even stable economic performance. Third main thing in this document

hyperinflation and it is not have any hyper-inflation effects of economic increase

because moderate rising price is grater that marginal impact of hyperinflations

similarly we can say that decrease in the hyperinflation rate have not any

important effects on economic increase. Therefore the main goal of policymakers

in growing countries is controlling moderate rising price.

India has managed its economic stability at the most appropriate way. There are

only two incidents which show the economic stability but they have managed

their demands and supply very effectively. Indian monitory and fiscal policy helps

the country in managing its financial increase and stability through the year and

helps in its people growth. Since the developed countries express a different

design of nonlinearity in the rising price- economic increase enterprise : the

magnitude of the bad impression of rising prices on increment diminutions as the

rising price rate multiplies, and even the low degree rising prices rate has a potent

disconfirming effect on economic increase, policymakers in developed countries,

unlike those in evolving Lands, should exercise attempts to keep the rising price

rate at zero percent seeing as a little bit of addition in rising prices will cause a

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important simplification in economic increase. This determination, to some

extent, subscribes the inflation-targeting pecuniary policy espoused by New

Zealand, Canada, the United Kingdom, and other countries.

The second portion of this document is very important and in this season

attempted to find the way which rising price affects on economic increase in a

nonlinear method for long term period. There is two main tools (linear model and

the model with threshold effects) are used for examined the efficiency of

investment and the level of investment. The useful thing is (TFP increase) for

both types of countries growing and developed, but not the investment level

(Investment /GROSS DOMESTIC PRODUCT), the channel which nonlinearly

affects economic growth and rising price adversely is hypothesized by existing

theoretical models.

Further more for growing countries the level of moderate rising price is below 65

percent and for developed countries the level of moderate rising price is below 42

percent, rising price show the significant effects on investment level. Most current

studies explain between rising price and long term economic increase role of the

level of investment (capital accumulation). Thus, according to paper’s

contribution we can say that the TFP increase is a important channel actually TFP

is only channel through which rising price affects economic increase in nonlinear

method for long term period.

Prasanna v Salian1, Gopakumar. K2

29

This research motivated by the current developments on the relationship between

rising price and economic increase and also proved some useful and important

tips for developed and growing economies. In this document, tally the long term

and short term dynamics relationship of rising price and economic increase by

using error correction model and co-integration model. In India we can tell that

using annual information that the important objective to search that if there is any

relationship in rising price and economic increase available than its any reason or

its nature. The exiting result found about this situation is that first is rising price

and economic increase is negatively related and the second thing is increase to

changes in rising prices rates is smaller than rising prices to changes in increase

rates. These solutions have main policy implications.

In this research the rising price and economic increase nexus has been

systematically analyze in India. The important result is that from the previous

period if any increase in rising price negatively effect on economic increase. The

most desired policy is there is always a constantly down press on rising price

without any information about what is the threshold level. Moreover policymaker

notes that negative effect on economic increase by the any increase in rising price

from the last nay period at any level. The main reason is decision maker and

common peoples do not like rising price has enormous behave on the

consumption method.

In India rising price has commonly under control. Various fiscal monetary and

administrative measures playing an important role in India to control a rising price

30

there is two period of rising price since 1980 but administrative measures and

various fiscal monetary controlled rising price efficiency. Also the results of

investment behavior in private manufacturing tell that an increase in level of

rising price rate is negative behavior on private investment in manufacturing.

India has managed its economic stability at the most appropriate way. There are

only two incidents which show the economic stability but they have managed

their demands and supply very effectively. Indian monitory and fiscal policy helps

the country in managing its financial growth and stability through the year and

helps in its people growth.

Stanley Fischer

Rising prices is importantly correlated utilizing the economic increase rate. The

simple regressions panel indicates or described the relationship between three

variables rising price unevenness economic increase and rising price. Now it is

possible with the help of increment accounting model to spot that main grooves

through which rising price comes down economic increase. In this research

document the author described with help of past research papers and studies that

results of the document inculpated that rising price effected on economic increase

by cutting the rate of productivity increase and trimming down investing. We also

see in exceptional cases that in long term period the low rising price and small

deficits were not important for high increment, high rising prices was not

consistent with survived increment.

31

HYPOTHESIS:

Whether there is impact of cpi on gdp growth.

There is no impact of cpi on gdp growth.

There is no impact of trailing cpi on gdp growth.

VARIABLES:

DEPENDENT: GDP growth

INDEPENDENT: CPI, log CPI

Research is base on quantitative bases and the data collection is on secondary

basis from published data of state bank of Pakistan and some business news

papers including economic survey of Pakistan reports.

32

MODEL AND FRAME WORK

METHODOLOGY:

Most of the information we collect on this subject used large number of countries

reporting with control panel information and crossbreed sectioned information.

For example Senhadji, khan and Burdekin draped many countries used crossbreed

sectioned information in the diagnostic. If individual countries have a rising prices

increment relationship researchers chose crossbreed sectioned information

because individual country generally lacks the strain of rising price experience

necessary to ascertain. Yet Easterly and Bruno described when information from

countries with 40 percent or more than 40 percent rising price are excluded from

the diagnostic than any crossbreed sectioned relationship between economic

increase and rising price loses importance. In the similar fashion, Barro and

Fischer used control panel information to take into thoughtful the time proportion

of rising price and economic increase. There are very few researches or surveys In

particular countries Mubarik research and Sing research both used in their

33

GDP GROWTHCPI_1

CPI

research time series data to calculate the rate of threshold rising prices. While in

this research reports data about CONSUMER PRICE INDEX, & GROSS

DOMESTIC PRODUCT takes from the State Bank of Pakistan and Economic

Policy Department libraries or storage machines.

Two types of data information is used to evaluate the mechanism through rising

prices impairs long term economic increase and to inquire the relationship

between rising price and economic increase.

In the period 1951 to 2010 the empirical framework account have used yearly

information of Gross Domestic Product and Consumer Price Index found from the

Pakistan Bureau Of Statistics, in the first phase in this empirical formwork for

example the connection between rising price and economic increase, firewood of

existent Consumer Price Index (1 CPIt *) & (2 CPIt-1) have been used. Moreover,

economic increase rates are calculated from the deviation of firewood of Cross

Price index and from firewood rates of rising prices.

34

Model Specification and Estimation Technique

We used the following linear regression equation formula: The main purpose of

the simple linear regressions was to uncover the general behave of the increasing

function relating the rising price rate and economic increase.

Where

Gross domestic product growth over a year

Perameters

Current year’s consumer price Index

Trailing year’s consumer price Index

The first regression equation formula described that common linear framework.

Even so, in above discussion we can easily described with the help of recent

studies that Threshold impacts are an accompaniment with a rising price rate

increasing some important value or below some important values according to

35

Smith, Boyd & Levine. In different words we can say that the relationship

between rising price and economic increase does not follow one specific pattern.

In this empirical framework threshold effects with estimation and inference

related econometric issues. To conduct correct results it is important to find and

create suitable methods. In this current important phase we explain a thoughtful

and nontechnical concept of the methodology. In this equation formula the main

two variables Log of Consumer Price Index (CPI) and Consumer Price Index

(CPI) calculate the level of rising price on Gross Domestic Product (GDP)

increase. The calculated solution from the simple regression framework (1) is

some consistent, extent with the existing condition.

36

RESULT AND DISCUSSION

Gdp growth shows the up and down trend from 1951 to 2010.

37

Cpi (consumer price index ) shows the up ward trend from 1951 to 2010.

SUMMARY OUTPUT

Regression CalculationsMultiple R 0.040735816R Square 0.001659407Adjusted R Square

-0.033995614

Standard Error 2.488505731Observations 59

Analysis of Variance( ANOVA)df SS MS F Significance F

Regression 2 0.576421 0.28821 0.046541 0.954562669Residual 56 346.789 6.192661Total 58 347.3654

38

Source: This study

Explanatory power of model is as low as 0.16% which is highly insignificant. As

ANOVA table shows very low F statistics of 0.04 (cutoff of F statistics is 4).

Moreover the F statistics also reflect that the model is insignificant.

Source: This study

The insignificance of individual variables is also observed from t statistics which

are 0.3 and -0.29 respectively (cutoff of t is 2). Only intercept is significant which

is further validated by p-value as both the coefficients’ p-value are not less than

0.05.

Equation # 2 Estimation:

This equation shows the single variable Consumer price index at time t (CPIt) to

estimate the growth in GDP.

Regression CalculationMultiple R 0.008707R Square 7.58E-05Adjusted R Square -0.01747Standard Error 2.468536Observations 59

39

Co-efficient Stan- Error t Stat P-value 95% Lower 95% UpperIntercept 5.150097504 0.433498683 11.88031 6.18E-17 4.281695297 6.01849971CPI 0.032026099 0.106259504 0.301395 0.76423 -0.18083726 0.24488946CPI_1 -0.0350302 0.117534512 -0.29804 0.766774 -0.27048011 0.20041972

Analysis of Variance( ANOVA)df SS MS F Significance F

Regression 1 0.026333 0.026333 0.004321 0.947817014Residual 57 347.3391 6.093668Total 58 347.3654

Source: This study

R-square shows goodness of fit which is very low which means overall model is

not fit. ANOVA table shows that very low F calculation of 0.004 (cutoff of F

statistics is 4). F statistics also indorses that the model is insignificant.

Co-efficient Stan- Error t Stat P-value 95% Lower 95% Upper

Intercept 5.12603824 0.422498322 12.13268 1.98E-17 4.279999948 5.97207653

CPI 0.00041249 0.006274791 0.065737 0.947817 -0.01215257 0.01297754Source: This study

The insignificance of individual variable is also observed from t statistics which is

0.065 which is less than 2 and it is further validated through p-value which is not

less than 0.05. Only intercept is significance

CONCLUDING REMARKS

The main purpose of this empirical according to the periods of yearly information

1951-2010 we calculate the Impact of rising price on economic growth in

Pakistan. After study all the information we found there is no impact on growth of

rising price in Pakistan. This phase is very important for Pakistan rising price rate

level because is this document we find out a point of view gradually coming into

being a relationship between 2 variables rising price & economic increase in

Pakistan. In this condition linear regression test methodology employed to define

40

the relationship about rising price and economic increase. Examine the

relationship between two variables rising price and economic increase we used

Consumer price index (CPI) as a power of attorney document for rising price and

the Gross Domestic Product (GDP) as a power of attorney document for

economic increase. This important information is belong a period from 1951-

2010. Using the regression framework I obtain the results of stationary test. The

null possibilities being that there are cellular levels but neglect to decline at first

difference inculpating that the things were found insignificance. So neglect to

refuse the possibility.

As this study resemblance to Manzoor Hussain (2005), his finding is same that the

result is insignificant so that there is no threshold level of inflation in Pakistan so

far as I found that insignificancy in result.

According to Mubarik description the threshold rate of level rising price is

9percent in Pakistan. Even so, a rise in interest rates is often contemporaneous

with an increase in rising price is found to have important positive effects on

economic increase up to 5% rising price level rate. In addition with this point, the

impact a rise in interest rates is often contemporaneous with an increase in rising

price on increment is positive but influence.After drawing reasoning and

conclusion recommdation is to keep in Pakistan rising price within the range of 4

to 6 percent. So it may be useful for capable of being maintained economic

increase. Similarly we can study the same Singh’s idea 2003 addition. He

describes the rate of targeting rising price range in India is 4 to 7 percent. So here

we can say that rising price in Pakistan is subject about the demand, supply and

41

stocks it is not a relating to or involving phenomenon completely. To keep rising

price in control in Pakistan it should calls a policy through Central Bank of

Pakistan (CBP).

REFRENCES

R.Barro Vol 78(1996). “Inflation and growth”, Reserve Bank of St. Louis Review.

Robert J Barro Cambridge press (1997) “Determinants of Economic Growth: a Cross Country Empirical Study”.

M.Bruno, and Easterly,( 1998) Vol.41“Inflation crises and long-run growth”, Monetary Journal.

42

S.Fischer,(1993) Vol.32 “The role of macroeconomic factors in economic growth”Monetary Economics journal.

Sahay Ratna, Stanley, Fischer, and Végh, (1996) Vol.10, “Stabilization and Growth in Transition Economies: The Early Experience,” economics journals.

Bruce, Hansen (1999), Vol.93 econometrics journal. “Threshold Effects in Non-Dynamic Panels Estimation, Testing and Inference”.

Hansen, “Sample Splitting and Threshold Estimation,” May (2000), Vol. 68

Chowdhury and A Hussain, (1996) LONDON. “Monetary and Financial Policies in Developing Countries”.

Khan, A., 2000.FEDERAL RESERVE BANK OF PHILADELPHIA, February (2000) “The finance and growth nexus. Business”.

S. Senhadji and, Mohsin S khan. (2000) IMF Working Paper “Threshold Effects in the Relationship between Inflation and Growth”.

Renelt. D and R.Levine,( 1992)American economic review ,vol.82 “A sensitivity analysis of cross-country growth Regressions”.

Yasir Ali Mubarak (2005) volume 1, no 1 (2005) “Inflation and Growth: An Estimate of the Threshold Level of Inflation in Pakistan” State Bank of Pakistan Research Bulletin.

K. Chowdhury and Kearny, (1997).Vol. 29 “Inflation and economic growth: a multi-Country empirical analysis”

Michael, sarel, (1996), “Nonlinear Effects of Inflation on Economic Growth,” IMFPapers, vol 43(march) International Monetary Fund.

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Kaliappa K and K. Singh. (2003) Journal of policy Modeling. “The Inflation-Growth Nexus in India: An Empirical Analysis” Vol .25.

“International Research Journal of Finance and Economics”Vol. 17 (2008) EuroJournals Publishing, Inc.

Alexander Bick. Department of Economics,“Threshold effects of Rising Price on economic Increase in developing countries”

Alexander Bick Department of Economics, Goethe University Frankfurt.

Working Paper Series: WP 0604”Rising Price and Economic Increase in Bangladesh”:Ahmed Shamim and Golam Mortaza December ,(2005) Policy Analysis Unit,Research Department, Bangladesh Bank.

“Rising Price on Economic Increase: Evidence From Four South Asian Countries”Mallik Girijasankar and Chowdhury Anis Asia-Pacific Development Journal, Vol. 8, No. 1, June (2001) IndianEconomic Service.

“Rising Price on Economic Increase in India –An Empirical Analysis” .Prasanna V Salian1,Gopakumar. K2

Manzoor Hussain. October 2005,” Rising Price and Increment: Estimation of Threshold Point For Pakistan”.Economic Policy Department, State Bank of Pakistan.

Xiao Jing.(2007)”The Relationship between Rising Price and Economic Increase of China”.

Gokal Vikesd & Hanif Subrina.”Relationship between Rising Price and Economic Increase”.Working Paper Vol. 4 December 2004 Economics Department Reserve Bank of Fiji Suva Fiji.

44

MinliVol 14 (2005)”.Rising Price and Economic Increase: Threshold Effects and Transmission Mechanisms”Department of Economics, University of Alberta.

Chien-Chiang Lee and Swee Yoong Wong Vol.3 no.2(2010), National Chung Hsing University Journal :Sustainable Development:“Rising Price and Economic Increase in Nigeria” Economic department.

45

46

APPENDIX

RESIDUAL OUTPUT

ObservationPredicted GDP

Growth Residuals1 5.40966923 -7.20966922 5.375763562 -3.67576363 5.365025494 4.834974514 5.368555743 -3.36855575 5.363334031 -1.8633346 5.377904791 -2.37790487 5.399285115 -2.89928518 5.372069023 0.127930989 5.372515079 -4.4725151

10 5.336530274 -0.436530311 5.318532279 0.6814677212 5.318054904 1.881945113 5.306114643 1.1938853614 5.264828627 4.1351713715 5.227170583 2.3728294216 5.176989977 -2.0769917 5.108163708 1.6918362918 5.076927116 1.4230728819 5.046786647 4.7532133520 5.128253878 -3.928253921 5.278901989 -2.97890222 5.21439201 1.5856079923 5.028316518 2.4716834824 4.684031472 -0.784031525 4.810484597 -1.510484626 5.305675899 -2.505675927 5.211733901 2.488266128 5.136762926 0.3632370729 5.04528812 2.2547118830 4.909348436 1.49065156

47

RESIDUAL OUTPUT

ObservationPredicted GDP

Growth Residuals31 4.986919241 2.61308132 5.230122897 1.56987733 5.172356402 -1.1723634 5.101921824 3.59807835 5.04391094 1.35608936 4.99572828 0.80427237 4.9373396 1.4626638 4.833705186 -0.0337139 4.713272626 -0.1132740 4.579791295 1.02020941 4.774154681 2.92584542 5.21469871 -2.914743 5.108008203 -0.6080144 4.97240905 -0.8724145 4.81978924 1.78021146 4.660808489 -2.9608147 4.501411801 -1.0014148 4.380753567 -0.1807549 4.290647045 -0.3906550 4.21437146 -2.2143751 4.619359754 -1.5193652 5.306156493 -0.6061653 5.272613671 2.22738654 5.207190193 3.7928155 5.117518486 0.68248256 5.029539172 1.77046157 4.917318014 2.28268258 4.71085618 -6.3108659 4.449916928 -0.64992

48

Dependent variable: GDP growth.

Independent variable: CPI & log CPI

Method : regression model

Observations : 60

Regression CalculationsMultiple R 0.040735816R Square 0.001659407Adjusted R Square

-0.033995614

Standard Error 2.488505731Observations 59

Analysis of Variance( ANOVA)df SS MS F Significance F

Regression 2 0.576421 0.28821 0.046541 0.954562669Residual 56 346.789 6.192661Total 58 347.3654

49

Co-efficient Stan- Error t Stat P-value 95% Lower 95% UpperIntercept 5.150097504 0.433498683 11.88031 6.18E-17 4.281695297 6.01849971CPI 0.032026099 0.106259504 0.301395 0.76423 -0.18083726 0.24488946CPI_1 -0.0350302 0.117534512 -0.29804 0.766774 -0.27048011 0.20041972

Dependent variable: GDP growth.

Independent: CPI.

Method: regression model.

Observations: 60

Regression CalculationMultiple R 0.008707R Square 7.58E-05Adjusted R Square -0.01747Standard Error 2.468536Observations 59

Analysis of Variance( ANOVA)df SS MS F Significance F

Regression 1 0.026333 0.026333 0.004321 0.947817014Residual 57 347.3391 6.093668Total 58 347.3654

Co-efficient Stan- Error t Stat P-value 95% Lower 95% Upper

Intercept 5.12603824 0.422498322 12.13268 1.98E-17 4.279999948 5.97207653

CPI 0.00041249 0.006274791 0.065737 0.947817 -0.01215257 0.01297754

50

GRAPHICAL REVIEW

51