Academic journal article Pakistan Economic and Social Review

OPENNESS, INFLATION AND GROWTH RELATIONSHIPS IN PAKISTAN an Application of ARDL Bounds Testing Approach

Academic journal article Pakistan Economic and Social Review

OPENNESS, INFLATION AND GROWTH RELATIONSHIPS IN PAKISTAN an Application of ARDL Bounds Testing Approach

Article excerpt

Byline: MUHAMMAD AFZAL, MUHAMMAD EHSAN MALIK A. RAUF BUTT and KALSOOM FATIMA

Abstract. Employing ARDL approach to cointegration, the present study validates the Romer (1993) hypothesis, i.e. the existence of the inverse connection between inflation and openness in Pakistan for the period of 1970-71 to 2008-09. A more robust inverse linkage between inflation and openness is noted in the short-run as compared to the long-run. Bi- directional causality running between inflation and openness is also found. The positive linkage between real GDP and inflation is observed that seems to be in line with the truth of Phillips curve and Okun's law. The study recommends that the economic managers of Pakistan's economy should adopt such policies that promote openness so that inflation can be controlled and economic growth can be accelerated.

Keywords: Inflation, Openness, Economic growth, ARDL, Causality

JEL classification: O11, F41

I. INTRODUCTION

The world has now become a global village. Knowledge, information and products are being exchanged very quickly and rapidly among nations.

The word `globalization' is not new, yet both the scope and the rate of change of the globalization process seem to have changed in the positive direction over time (Taylor, 2006). Both the foreign direct investment (FDI) and global trade flows have witnessed significant increase since early 1980s (IMF,2006) and almost all the open economies are affected by the current globalization process. However, the impact of globalization seems to be varying from economy to economy, depending upon the nature, structure and degree of openness of the economy. Starting right from laymen, politicians, sociologists, economists, and international relation experts to academia all are widely and rigorously discussing and debating the impact of globalization and liberalization on human well being in the 21st Century.

Economic globalization is a process of increasing the connectivity and interdependence of markets and business by removing restrictions and barriers on exchange of knowledge, products and commodities across the borders and regions. Economic globalization promotes cultural, financial and trade reliance among nations. Globalization is generally expected to reduce poverty and enhance economic development through faster growth in most integrated economies. Burger and Krueger (2003) has shown that trade openness causes an increase in aggregate incomes and thereby economic growth (EG). According to IMF (2006), economic globalization depends on over time human innovation and technological progress. It is concerned with increasing integration of economies around the world, particularly through trade and finance flows. It is also concerned with the movement of labour and technology across international borders. In addition, globalization has broader cultural, political and environmental dimensions.

Economic globalization and trade openness have become the major cause of the flows of the international capital and more productive utilization of the under employed resources. The link between trade openness and the inflation (Inf) is still an empirical question or even a puzzle in the economic literature. For a better macroeconomic management, Inf must remain in control. Inf affects (is affected by) EG and trade openness. Therefore macroeconomic managers must take into account the interrelationship among trade openness, EG and Inf Understanding the relationship among trade openness, EG and Inf is being studied in economic literature for development of the economy of a nation. Theoretical literature illustrates that openness helps in the efficient allocation and utilization of resources through comparative advantage that, in turn, leads to increased EG (IMF, 2006).

Trade openness is a tool of anti-monopoly as well as a medium for the long-windedness of the new technology, ideas and managerial skills among nations. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.