Background of problem/Problem development

Inflation has always been a subject of study in accordance with economic growth. Policymakers have always given inflation an important place while formulating policies. During the economic crisis in 1929 (Erman & Okuyan, 2008) Keynesian policies were implied to many countries that proved out to be effective. However, in accordance to those policies, there was an increase in total demand that increased the inflation. Inflation was not regarded as a problem during that period. As a matter of fact, people thought inflation to be posing a positive effect on economic growth. Phillips curve was a theory in those days that complemented the positive effect of inflation on economic growth by creating a low unemployment rate. In 1970s some countries experienced negative economic growth with high inflation rates followed by hyperinflation in Latin American countries in 1980s that caused a change in economists’ view towards the relationship of inflation and economic growth.

Today a general consensus of economists believes high rates of inflation to be rather creating problems than reducing them. According to a study (Li) impact of inflation on Monetary Policy varies for developing countries and developed countries.

Inflation in Pakistan has affected Monetary Policy ever since its existence. Different researchers have identified different causes for inflation such as political instability (Safdar & Farooq Saqib, 2009) and monetary variables such as money supply, interest rates and import prices (Schimmelpfenning & Khan, 2006). The aim of this study is to use statistical measures to test the relationship of these factors that cause inflation with economic growth during the aforementioned period in Pakistan.

Problem definition

In this study the relationship between inflation and Monetary Policy in Pakistan has been examined using data covering the period from 1991-2009T he relationship between these two variables has been one of the most important macroeconomic problems and a crucial one for the policymakers. The topic has been debated many times in the past by well known economists so there has been more than enough work already done on this topic and various theories have been developed over the years. In order to understand the relationship between inflation and economic growth, it is important to understand the basic concept of inflation and the factors that are bound to cause inflation. Sufficient data for the time period under consideration is available via many databases to conduct this research. It is very vital for the policymakers to understand the concept of inflation and how it can affect economic growth of a country especially in a developing country like Pakistan and inflation has indeed affected Pakistan’s economic growth over the course of years. In order to see whether the effect was positive or negative, there is a need to conduct this research.

Research objectives

To test the impact of “broad money” on “GDP growth rate”

To test the impact of “credit to private sector” on “GDP growth rate”

To test the impact of “imports” on “GDP growth rate”

To test the impact of “income per capita” on “GDP growth rate”

To test the impact of “investments” on “GDP growth rate”

To test the impact of “CPI” on “GDP growth rate”

To test the impact of “population” on “GDP growth rate”

To test the impact of “interest rate” on “GDP growth rate”

Definitions (Glossary and Operational in Table format)

Broad money: The amount of money in a country’s economy, measured by counting money kept by banks and people.