Research

PBR October 2005

INFLATION AND GROWTH: ESTIMATION OF THRESHOLD POINT FOR PAKISTAN

1

Manzoor Hussain Economic Policy Department, State Bank of Pakistan

Abstract The paper is primarily meant to estimate threshold level of inflation in Pakistan using annual data for the period 1973-2005. The paper uses standard econometric technique to estimate threshold effect and suggests that targeting inflation exceeding a range of 4 - 6% will be a deterrent to economic growth. This range of inflation is tolerable for Pakistan as inflation is subject to both supply and demand shocks. Therefore the central bank in Pakistan should keep inflation stable, as it may be helpful for the achievement of sustainable economic growth. The findings of this study are also consistent with a similar study (Singh (2003) which suggests targeting inflation within a range of 4 7 % for India. I. Introduction

Recent economic research work has explored different aspects of inflation-economic growth relationship over the last many years. One aspect of this research work is to identify the breakpoints after which inflation is harmful to economic growth. Some studies find a threshold rate of inflation, above which the effect of inflation on growth is significant and negative, while below the said level, it is insignificant and positive. However, as the empirical evidence by recent research work differs substantially across the countries there is no consensus over the point after which the inflation is deterrent to economic growth. Fischer (1993) used a spline regression and found a negative relationship at all levels of inflation. Barro (1996) found inflation harmful to growth but his findings were driven by
. The views expressed in this paper are those of the author and do not necessarily represent those of the State Bank of Pakistan Author is thankful to Mr. Ayub-ul-Hasan, Senior Economist, Economic Policy Department, State Bank of Pakistan for his valuable comments and suggestions on an earlier draft.
1

2 the observations where inflation exceeded 20%. Below that, the point estimate was negative but statistically insignificant. Bruno and Easterly (1998) found that countries with annual inflation above 40% grow significantly lower than countries with inflation rates below 40%. Using the most advanced econometric techniquesi, Khan and Senhadji (2001) found 1% threshold level of inflation for industrialized countries, which means above 1% it would have negative effects on growth. On the contrary, Burdekin (2000) found a threshold level of 8% for the said countries. This result is also consistent with the findings of Sarel (1996) which tested for a structural break and found that inflation is negatively related to growth after 8%. However, the point estimate for inflation below 8% was found positive but statistically insignificant. Similarly, Ghosh and Phillips (1998) used 2.2% threshold level of inflation in the analysis for industrialized countries while Judson and Orphanides (1996) assumed 10% threshold level without empirical testing. In the same way, Khan and Senhadji (2001) found 11% threshold level of inflation for developing countries (including India & Pakistan); again below 11% the inflation-growth effect is positive but insignificant. Another study conducted by Burdekin (2000) found a threshold level of 3% or less for developing countries (including India & Pakistan). The review of literature reveals prevalence of significant differences/variations among the results of empirical studies, as the effects of inflation on growth are quite different across the countries. Moreover, the divergence of results were quite wide in case of empirical studies which concentrated on estimation of threshold rate of inflation for individual countries. For example, Singh (2003) found no threshold level for India whereas Mubarik (2005) found a threshold rate of inflation as high as 9% for Pakistan. Some of the explanatory factors for significant variations in the results of above studies may include data problems, methodological issues and estimation problems, etc. A number of studies followed linear approaches while others used non-linear techniques for the estimation of threshold rate of inflation for countries. For example, Khan and Senhadji (2001) used non-linear approach and found stark differences in threshold level of inflation between developing and industrialized countries. Mubarik (2005) also used the same approach for the estimation of threshold effect for Pakistan. Being the most recent study on the subject, a birds eye view of the shortcomings attached with Mubarik (2005) study has been given in the following paragraphs: 1. The study uses HP filter to remove volatility in growth of GDP, population, investment and inflation data. The problem in using such a filter is that it is purely empirical in nature and provides ad hoc solution to the problem of trend estimationii. If only estimation of a long-run trend is the concern, the time series based techniques of HP-based filters provide quite quick and reliable estimatesiii. Kuttner (1994) argued that the main drawback with HP filtered data is that it lacked substantive economic contentiv. It hardly needs emphasis that there is no study on the subject which had used such data for the estimation of threshold effects as it tend to destroy the quality of regression estimates.

2. The results of the study appeared to be spurious as they are plagued with the autocorrelation problem due to the existence of high R2 values (0.99) with low DW statistics (i.e. 0.69). 3. The study does not address adequately the issues pertaining to robustness. 4. The study follows a non-linear approach for the estimation of threshold level without providing any evidence of non-linear relationship between the variables. 5. The results of the Granger Causality test used for the identification of linear causality are also doubtful as they change significantly if the sample period is extended from 1973-2000 to 1973-2005. 6. Most of the South Asian countries have similar economic structure and until very recently have followed, and are still following, roughly similar economic policies e.g., a relatively large public sector, a nationalized financial sector and five-year plans though with varying emphasisv. As mentioned earlier, with regard to India, Singh (2003) found no threshold level of inflation while Mubarik (2005) found it at 9% for Pakistan. This diversity in the point estimates of inflation for the two neighboring countries with almost similar economic conditions calls for reexamining of the threshold level of inflation of 9% for Pakistan. The main objective of this study is to revisit the threshold level of inflation for Pakistan, as 9% threshold level [Mubarak (2005)] appears to be on the very high side. This paper follows the methodology used by various researchers including Khan and Senhadji (2001)vi, Singh (2003) and Mubarik (2005). The paper is organized follows: Section II contains data and methodological issues. Section III embodies the empirical results. Section IV consists of the inferences drawn on the basis of study made in the previous section. Appendix A contains data on (a) threshold estimates and (b) results of sensitivity analysis. Appendix B consists of graphs on stability tests and recursive coefficients. A list of a few major references are given at the end. II. DATA AND METHODOLOGY

Data Description Most of the studies conducted on the subject used cross sectional data & panel data with the coverage of a large number of countries. For example, Khan and Senhadji (2001) and Burdekin (2000) used cross sectional data and covered many countries in the analysis. Researchers prefer to use cross sectional data because single country typically lacks the variety of inflation experiences necessary to determine if there is an inflation/growth relationship (Judson and Orphanides 1996). However, Bruno and Easterly (1998)

4 reported that any cross-sectional relationship between inflation and growth loses significance when data from countries with 40% or more inflation are excluded from the analysis. Similarly, Fischer (1993) and Barro (1996) utilized panel data to take into consideration the time dimension of inflation and growth. There are a very few studies [viz. Singh (2003) and Mubarik (2005)] which used time series data to estimate threshold rate of inflation for individual countries. The current study also uses annual data for the period 1973 to 2005 for the estimation of threshold level of inflation for Pakistan. While data source on CPI, GDP, population and investment is Pakistan Economic Surveysvii (different issues), data on M2 is taken from database of Economic Policy Department, State Bank of Pakistan. Threshold Effects Threshold models have a wide variety of applications in economics. Direct applications include models of separating and multiple equilibriaviii. This idea is related to nonlinearity of relationship between economic variables. A few studies also focused on the possibility of nonlinear relationship between inflation and economic growthix. For the estimation of threshold of inflation, this paper also follows nonlinear approach used by various researchers, including Mubarik (2005). The following equation is estimated for the period 1973 to 2005 for Pakistan. Yg = b0 +b1 (inf) +b2 *Dt (inf-k) + b3 (Pg) + b4 (Ig) + b5 (Fin) +v ----------------- (1) Where Yg = Growth rate of real GDP Inf = CPI inflation Pg = Population growth rate Ig = Investment-income ratio Fin= M2-GDP ratio k = Threshold level of inflation v = Error term Dt = dummy variable Dt =1, if inf >k Dt =0, if inf< k While k denotes the threshold level of inflation with the property of inflation rate being below inf, the variables are all equal to zero and the effect of inflation is estimated by the coefficient on inf: (b1). But when the inflation rate is at higher levels, the coefficient on inflation is the sum of b coefficients. In order to locate the threshold level of inflation we first allow for one break by varying the inflation rate from a low level to a high level. Standard statistical tools are used to identify the threshold point and check the reliability of the regression estimates.

5 III. EMPIRICAL EVIDENCE Data examination The plotting of data reveals that the variables for log(GDP) and log(CPI) show a trend. At first sight, both data series appear to be integrated of order one i.e. I(1). Unit root tests will determine the order of integration of the variables.
1 5 .6 1 5 .2 5 4 3 2 1 1975 1980 1985 L O G (Y D ) 1990 1995 L O G (C P I) 2000 2005 1 4 .8 1 4 .4 1 4 .0 1 3 .6

Similarly, the data on inflation [i.e. Dlog(CPI)] and GDP growth [i.e. Dlog(Yd)] reveal a mixed trend. Apparently, we cannot draw any conclusion about nature of relationship between the two variables. However, the coefficient of correlation (i.e. 0.015) reveals a weak but positive relationship between these variables. With the exclusion of extreme values for 1974 and 1975, the correlation coefficient improves (i.e. 0.027) but still shows positive and weak association between the variables. The correlation is not far from zero, which also indicates the possibility of lack of relationship between inflation and growth. It would be worthwhile to mention that Corrigan and Yatrakis (1997) found no correlation between the two variables for the US economy.
30

Y G R v s . IN F 9

25

8
20 15

7 6 YGR 5 4

10 5

3
0 1975 1980 1985 IN F 1990 1995 YG R 2000 2005

2 1 2 4 6 8 IN F 10 12 14

The scatter diagram also indicates absence of correlation between the two variables and the data appear to be of random distribution.

But if we plot the data smoothened by HP filter, we observe a smooth trend. This also confirms the loss of important information contents due to smoothening of inflation and economic growth data.
18 16 14 12 10 8 6 4 2 1975 1980 1985 H P IN F 1990 HPGDP 1995 2000

However, the scatter diagram provides a weak evidence of positive relationship between the variables. The coefficient of correlation is 0.08 which is still near zero. Further, we observe extremes in the smoothed data despite using Hodrick-Prescott (HP) filter to remove extremes or volatility in the data.
H P G D P vs. H P IN F 6 .5 6 .0 5 .5 HPGDP 5 .0 4 .5 4 .0 3 .5 3 .0 6 8 10 12 H P IN F 14 16 18

Before estimating the threshold effects, we need to check important statistical features of the data as most of the macroeconomic variables contain unit root and are non-stationary in nature. We check the data and found that the data on levels is non-stationary for all cases while the data on first difference is stationary or integrated of order one i.e. I(1). Therefore, any estimated relationship between the growth rate and inflation for Pakistan would not be spurious. As regard results of unit root test for smoothened data, we find a significant trend and the data on first difference is stationary or integrated of order one i.e. I(1).

7 Estimation of Threshold Effects Finally, threshold level of inflation is estimated for Pakistan. The results of the study are important from following points of view: 1. The study provides estimates of threshold effects without using smoothened data series (Appendix Table A). These results are compared with those computed by Mubarik (2005)x. It is interesting to note a significant variation among results of smoothed and unsmoothed datasets for the same variables and for the same time period. Further, the results of HP filter data (Mubarik 2005) are doubtful xi as they embody problems relating to the estimation and autocorrelation, coupled with lacking of adequate usage of robustness tests. It unequivocally suggests that the estimated threshed level for Pakistan of 9% should not be treated as reliable. 2. The results of equation 1 are presented in Table 1. These results reveal that the impact of contemporaneous inflation on growth is positive but significant at 5% inflation. After that rate, impact of contemporaneous inflation on economic growth is positive but insignificant. 3. The lagged impact of inflation (up to 2 lag) on growth is negative and significant. 4. The threshold variable is negative but significant at 5 % rate of inflation. Before and after this point, it is negative but insignificant. 5. The impact of population growth is positive. Other variables were also included in the model but later on dropped as they were found to be insignificant. 6. The ADF test of unit root for residuals confirms the existence of co-integrated relationship between growth and inflation. To check the stability of estimated parameters over the observation period and establish the usefulness of model with k=5, Chow test was performed which confirms the constancy of estimated parameters. Similarly, the cumulative sums (CUSUM), CUSUM square test2 and recursive coefficient tests3 were conducted (Appendix B). These tests also confirm the absence of any breakpoint in the relationship between the two variables for Pakistan. The above findings have strong implications for the conduct of monetary policy, as price stability is the most important goal of a central bank not only in Pakistan but also all over the world. These findings suggest that the central should keep inflation stable and low, as high inflation is harmful for economic growth. Keeping inflation within the targeted
This test computes cumulative sum of residuals and compares them with the critical levels. Movements outside the critical lines suggest instability of the parameters. The CUSUM square test is particularly powerful tool to investigate the stability of estimated parameters if the shifts in the equation are systematic. 3 This test plots the recursive residuals and residuals outside a band of plus and minus two standard errors suggest instability of parameters.
2

8 range of 4 - 6% may be helpful for economic growth in Pakistan as inflation is subject to supply and demand side shocks.
Table 1 Estimation of Model using OLS (Sample 1973 2005) (Dependent Variable: GDP growth) Coefficient Std. Error t-Statistic Prob. R2
2.20 -0.15 -2.29 0.64 1.32 -0.16 -1.26 0.64 0.04 0.56 -0.16 -0.70 0.65 2.20 1.56 0.06 1.59 0.37 0.63 0.06 0.67 0.36 2.73 0.37 0.06 0.41 0.37 1.88 1.40 -2.53 -1.44 1.69 1.80 -2.73 -1.89 1.75 0.02 1.51 -2.69 -1.68 1.77 1.17 0.17 0.01 0.16 0.10 0.08 0.01 0.06 0.09 0.98 0.14 0.01 0.11 0.08 0.25 0.29

K 4%

Variables
INF INF(-2) (INF>4)*(INF-4) Pg C INF INF(-2) (INF>5)*(INF-5) Pg C INF INF(-2) (INF>6)*(INF-6) Pg C

DW
2.04

5%

0.33

2.02

6%

0.31

1.96

IV.

CONCLUDING REMARKS

The paper is primarily meant to estimate threshold level of inflation for Pakistan using annual data for the period 1973-2005. It finds no threshold level of inflation for Pakistan. These results are in sharp contrast to the findings of Mubarik (2005) where inflation threshold level for Pakistan is at 9%. However, the contemporaneous inflation is found to have a significant positive impact on economic growth up to 5 percent inflation rate. Beyond this point, the impact of contemporaneous inflation on growth is positive but insignificant. On the basis of the inferences drawn from the study it is desirable to keep inflation within a range of 4-6% in Pakistan, as it may be helpful for sustainable economic growth. This idea is consistent with a similar study made by Singh (2003), which suggests to target inflation within a range of 4 - 7% for India. It may be added here that inflation in Pakistan is subject to supply and demand shocks and it is not monetary phenomenon entirely. It calls for a policy through which Central Bank in Pakistan should keep the inflation stable, irrespective of any threshold level.

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Appendix A Table A: Threshold Estimates a) With data smoothening (Mubarik (2005) Dependent Variable: HPGDP Method: Least Squares Date: 10/24/03 Time: 12:30 Sample(adjusted): 1980 2000 Included observations: 21 after adjusting endpoints Variable HPINF(-2) (HPINF(-2)>9)*(HPINF(-2)-9) HPGPOP(-2) HPGINVST(-2) C R-squared Adjusted R-squared S.E. of regression Sum squared resid Log likelihood Durbin-Watson stat b) Without data smoothening Dependent Variable: GDP Method: Least Squares Date: 10/24/03 Time: 12:44 Sample(adjusted): 1980 2000 Included observations: 21 after adjusting endpoints Variable INF(-2) (INF(-2)>9)*(INF(-2)-9) GPOP(-2) GINVST(-2) C R-squared Adjusted R-squared S.E. of regression Sum squared resid Log likelihood Durbin-Watson stat Coefficient -0.036944 -0.406732 1.363877 0.010779 2.071444 0.518541 0.398177 1.350123 29.16531 -33.24651 1.701543 Std. Error 0.228702 0.488926 0.458049 0.075389 2.193934 t-Statistic -0.161537 -0.831890 2.977576 0.142980 0.944169 Prob. 0.8737 0.4177 0.0089 0.8881 0.3591 5.223751 1.740359 3.642525 3.891221 4.308089 0.014864 Coefficient -0.021764 -0.058965 2.493884 0.117404 -2.992830 0.999337 0.999172 0.026591 0.011313 49.22854 0.696565 Std. Error 0.009640 0.021974 0.034890 0.004649 0.129099 t-Statistic -2.257839 -2.683447 71.47830 25.25509 -23.18252 Prob. 0.0383 0.0163 0.0000 0.0000 0.0000 5.123205 0.923885 -4.212242 -3.963547 6031.889 0.000000

Mean dependent var S.D. dependent var Akaike info criterion Schwarz criterion F-statistic Prob(F-statistic)

Mean dependent var S.D. dependent var Akaike info criterion Schwarz criterion F-statistic Prob(F-statistic)

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Results of Sensitivity Analysis a) With data smoothening (Mubarik (2005) Dependent Variable: HPGDP Method: Two-Stage Least Squares Date: 09/22/05 Time: 10:38 Sample(adjusted): 1981 2000 Included observations: 20 after adjusting endpoints Instrument list: HPINF(-3) HPGINVST(-3) HPGPOP(-2) HPGDP(-3) Variable HPINF(-2)
(HPINF(-2)>9)*(HPINF(-2)-9)

Coefficient Std. Error -0.008541 -0.113146 2.517694 0.117380 -3.159449 0.999240 0.999038 0.028793 4933.676 0.000000 0.013682 0.048718 0.041784 0.005060 0.178997

t-Statistic -0.624269 -2.322458 60.25450 23.19946 -17.65087

Prob. 0.5418 0.0347 0.0000 0.0000 0.0000 5.082371 0.928239 0.012435 0.983067

HPGPOP(-2) HPGINVST(-2) C R-squared Adjusted R-squared S.E. of regression F-statistic Prob(F-statistic)

Mean dependent var S.D. dependent var Sum squared resid Durbin-Watson stat

a) Without data smoothening Dependent Variable: GDP Method: Two-Stage Least Squares Date: 10/24/03 Time: 12:48 Sample(adjusted): 1981 2000 Included observations: 20 after adjusting endpoints Instrument list: INF(-3) GINVST(-3) GPOP(-2) GDP(-3) Variable INF(-2) (INF(-2)>9)*(INF(-2)-9) GPOP(-2) GINVST(-2) C R-squared Adjusted R-squared S.E. of regression F-statistic Prob(F-statistic) Coefficient -0.497214 0.900797 1.234258 0.212200 2.223911 -0.031822 -0.306975 1.976044 1.673971 0.208112 Std. Error 4.023080 15.60084 1.417462 1.296429 33.15288 t-Statistic -0.123590 0.057740 0.870752 0.163680 0.067080 Prob. 0.9033 0.9547 0.3976 0.8722 0.9474 5.128480 1.728474 58.57123 2.030430

Mean dependent var S.D. dependent var Sum squared resid Durbin-Watson stat

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Appendix B STABILITY TESTS Cumulative Sums (CUSUM) Test
1 5 1 0 5 0 -5 -1 0 -1 5 8 4 8 6 8 8 9 0 9 2 9 4 9 6 5 % 9 8 0 0 0 2 0 4

C U S U M

S ig n ific a n c e

CUSUM Square Test

1 .6

1 .2

0 .8

0 .4

0 .0

-0 .4 8 4 8 6 8 8 9 0 9 2 9 4 9 6 9 8 5 % 0 0 0 2 0 4

C U S U M

o f S q u a re s

S ig n ific a n c e

12 Recursive Coefficients
16 12 8 4 0 -4 -8 88 90 92 94 96 98 00 02 2 S .E . 04 4 3 2 1 0 -1 -2 88 90 92 94 96 98 00 02 2 S .E . 04

R e c u r s iv e C ( 1 ) E s tim a te s

R e c u r s iv e C ( 2 ) E s tim a te s

.0 0 - .0 5 - .1 0 - .1 5 - .2 0 - .2 5 - .3 0 88 90 92 94 96 98 00 02 2 S .E . 04

2 1 0 -1 -2 -3 -4 88 90 92 94 96 98 00 02 2 S .E . 04

R e c u r s iv e C ( 3 ) E s tim a te s

R e c u r s iv e C ( 4 ) E s tim a te s

3 2 1 0 -1 -2 -3 88 90 92 94 96 98 00 02 2 S .E . 04

R e c u r s iv e C ( 5 ) E s tim a te s

13 References Barro, R., 1996. Inflation and growth, Federal Reserve Bank of St. Louis Review, vol. 78, pp. 153-169. Barro, Robert J., Determinants of Economic Growth: a Cross Country Empirical Study, Cambridge, MA, MIT Press, 1997. Bruno, M. and W. Easterly, 1998. Inflation crises and long-run growth, Journal of Monetary Economics, vol. 41, pp. 3-26. Bruno, M., 1995. Does high inflation really lower growth?, Finance and Development, vol. 32, pp. 35-38. Burdekin, at el 2000, When Does Inflation Hurt Economic Growth? Different Nonlinearities for Different Economies, Working Papers in Economics, Claremont Colleges, August 2000. Chan, Kung-Sig, and Ruey S. Tsay, 1998, Limiting Properties of the Least Squares Estimator of a Continuous Threshold Autoregressive Model, Biometrica, Vol. 85, No. 2, pp. 41326. Corrigon & Yatrakis 1997Effects of Inflation on Economic Growth in Africa, available on the web. Fischer, S., 1993. The role of macroeconomic factors in economic growth, Journal of Monetary Economics, vol. 32, pp. 485-512. Fischer, Stanley, Ratna Sahay, and Carlos Vgh, 1996, Stabilization and Growth in Transition Economies: The Early Experience, Journal of Economic Perspectives, Vol. 10 (Spring), pp. 4566. Ghosh, Atish, and Steven Phillips, 1998, Warning: Inflation May Be Harmful to Your Growth, IMF Staff Papers, International Monetary Fund, Vol. 45, No. 4, pp. 672710. Gillman, Max, and Michal Kejak, 2000, A Non-Linearity in the Inflation-Growth Effect, Central European University Department of Economics Working Paper 14/2000. Gillman, Max, and Michal Kejak, 2001, Modeling the Inflation-Growth Effect, Central European University, Department of Economics Working Paper 18/2000; revised. Hansen, Bruce 1999, Threshold Effects in Non-Dynamic Panels: Estimation, Testing, and Inference, Journal of Econometrics, Vol. 93, No. 2, pp. 34568. Hansen 2000, Sample Splitting and Threshold Estimation, Econometrica, Vol. 68 (May), pp. 575603.

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Hossain, A. and A. Chowdhury, 1996. Monetary and Financial Policies in Developing Countries, London: Routledge. Judson, R., and A. Orphanides 1996: Inflation, Volatility and Growth, Board of Governors of the Federal Reserve System, Finance and Economics Discussion Series,96(19). Khan, A., 2000. The finance and growth nexus. Business Review, Federal Reserve Bank of Philadelphia, January/February, 3-14. Khan, Mohsin S., and Abdelhak S. Senhadji, 2000, Threshold Effects in the Relationship Between Inflation and Growth, IMF Working Paper, June. Levine, R. and D. Renelt, 1992. A sensitivity analysis of cross-country growth regressions, American Economic Review, vol. 82, pp. 942-963. Levine, R. and S. Zervos, 1993. What have we learned about policy and growth from cross-country regressions?, American Economic Review, vol. 83, pp. 426-430. Mubarik, Yasir Ali (2005), Inflation and Growth: An Estimate of the Threshold Level of Inflation in Pakistan, State Bank of Pakistan Research Bulletin, Volume 1, Number 1, 2005. Paul, S., C. Kearney and K. Chowdhury, 1997. Inflation and economic growth: a multicountry empirical analysis, Applied Economics, vol. 29, pp. 1387-1301. Sarel, Michael, 1996, Nonlinear Effects of Inflation on Economic Growth, IMF Staff Papers, International Monetary Fund, Vol. 43 (March), pp. 199215. Singh, K. Kaliappa K. (2003), The Inflation-Growth Nexus in India: An Empirical Analysis, Journal of Policy Modeling, 25(2003), pp 377-396. Temple, J., 2000. Inflation and growth: Stories short and tall, Journal of Economic Surveys 14, 395-426.
Notes
i

Developed by Chan and Tasy (1998) and Hansen (1999, 2000). Mubarik (2005),the dataset is further smoothed using Hodrick-Prescot filter, page, 40. The estimates are also sensitive to the end-of-the-sample problems. K. Kuttner (1994), Estimating Potential Output as a Latent Variable, Journal of Business and Economic Statistics, 12, 3, p. 362 Girijasankar (2001).

ii

iii

iv

15

It is interesting to note that Mubarik (2005), claims that the model is developed by Khan and Senhadji (2001) for the analysis of threshold level of inflation for industrialized and developing countries, page 39, while Khan and Senhadji (2001) themselves explained that -------------using new econometric methods for threshold estimation and inference, developed by Chan and Tsay (1998), and Hansen (1999, 2000), page, 3.
vii

vi

Economic Surveys is an official document of Government of Pakistan. Hasen (2000).

viii

ix

Fisher (1996), Sarel (1996), Ghosh and Phillips (1998), Bruno & Easterly (1998), etc.

The results of smoothed and un-smoothed data are compared with k=9. This threshold level is particularly chosen for comparison purposes because Mubarik (2005) suggests 9% threshold level of inflation for Pakistan. The value of R2 is 0.99 while the DW statistics is around 0.69.

xi