Inflation, Inflation Uncertainty and Economic Growth Nexus in Pakistan: A Granger Causality Test

Abstract

This study analyses the linkage among inflation, inflation uncertainty andeconomic growth for Pakistan using annual time series over the period of 1972-2012. The conditional volatility of inflation is captured by ARCH model and asymmetry of shocks is captured through EGARCH model. The results show that negative shocks to error term have larger impact on variance of inflation than positive shocks. The results of Granger Causality revealed that inflation Granger causes output growth negatively and output growth Granger causes inflation uncertainty positively. In order to achieve and maintain a reasonablegrowth rate, government of Pakistan must pay proper attention to achieve price stability in the country.