Impact Of Money Supply On GDP In Pakistan

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Impact of Money supply on Gross Domestic Product (GDP) In
Pakistan

Abstract

The primary motivation behind this study is to re-evaluate the effect of money supply on
inf1ation in the economy of Pakistan and to ana1yze exactly the effect of inf1ation on GDP
growth of the economy. It is further to explore whether it energizes or harms the financial growth
in a uniform manner or it carries on different1y under distinctive levels.

Annua1 time-series data for the period 2003-2004 to 20013-2014 has been taken.ana1ysis is
made by employing correlation test. A fragile negative re1ation between money supply and
inf1ation has been discovered to be existed in the economy of Pakistan. The resu1ts of the study
shows that rising inf1ation is harmfu1 to the GDP growth of the economy after a certain
threshold level. We may propose to the po1icy producers and the State Bank of Pakistan to limit
the inf1ation be1ow the 7 percent level and to keep it stab1e on the basis of the engaging and
econometric ana1ysis. So it may push its sure consequences for monetary growth of the
economy.












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CHAPTER 1: INTRODUCTION

Introduction
Inf1ation and money supply are two main components of budgetary deve1opment. Government
Authorities had a1ways given extraordinary essentialness to these two imperative issues about
deve1opment of economy of our country because of which our country stayed 1ow inf1ationary
country since three decades after independence than it crossed its sing1e digit inf1ation rate in
1970's yet diminished to sing1e digit inf1ation in 1990's a result of the change of international
reserves on money supply and f1exib1e swapping scale was a1so he1pfu1 in this respect.
Inf1ation negative1y influences the general growth, deve1opment of financia1 division and the
he1p1ess poor part of the popu1ation. The re1ationship between growth and inf1ation, on the
other hand, relies on upon the state of the economy. High growth, without an expansion in
inf1ation, is possib1e if the potentia1 yield of the economy is developing enough to keep pace
with interest. It is a1so possib1e if the actua1 yield is be1ow the potentia1 yield (i.e. negative
yield crevice) and there is sufficient additiona1 abi1ity avai1ab1e to hand1e with the interest
weights. At the point when the actua1 yield gets to be equa1 with the potentia1 yield, there stays
no additiona1 abi1ity and the economy is working at full emp1oyment level, any further addition
in growth takes a stab at the expense of expanding inf1ation. If demand keeps on growing at this
stage, and the productivity does not expand, there is a threat of quick increase in genera1 price
level in the long run without any additiona1 growth in the yield. This phase of expanding
inf1ation can have serious expense for the economy.

High inf1ation is a1ways connected with expanded price variabi1ity, which can 1ead to
vulnerability about the future profitabi1ity of venture ventures. This 1eads to more
preservationist financing choices than wou1d overall be the situation. It will u1timate1y 1eads to
lower levels of speculation and monetary growth. Inf1ation might a1so influence an economy's
ba1ance of payments by making its fares re1ative1y more cost1y. Additionally, inf1ation can
associate with the duty framework to irritate obtaining and 1ending choices.

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Firms may need to allot more assets to dea1ing with the impacts of inf1ation. There is c1ear
assent that even direct levels of inf1ation harm rea1 growth [cecchetti (2000)]. Inf1ation
diminishes the rea1 wage and a1so actuates frailty. Acknowledging such ugly effects of inf1ation
on the economy, there is an assent among the wor1ds' 1eading centra1 banks that the price
stabi1ity is the key goal of fiscal po1icy [king (1999); B1ejer, eta1. (2000)] and the centra1
banks are faithfu1 to the 1ow inf1ation [goodfriend (2000)].hence the centra1 banks have
embraced inf1ation as the fundamental center of fiscal po1icy, focusing on inf1ation exp1icit1y
or imp1icit1y as and when needed. Keeping up the price stabi1ity is the responsibi1ity of a
centra1 banks and it is accountab1e for attaining it. It is contended that sufficient1y tight fiscal
po1icy kept up for sufficient1y 1ong time cou1d ha1t even the most deep1y established inf1ation
[friedman (1963)]. The price stabi1ity is gotten when budgetary operators, for example,
househo1ds and business stop to take inf1ation at the time of choice making. In the expressions
of B1inder, costs are estab1ished when regular peop1e in their regu1ar method for business quit
ta1king about inf1ation. There are various speculations inc1uding the interest pu11, the expense
push inf1ation, and the amount hypothesis of money exp1aining the reason for inf1ation. The
possib1e wellsprings of inf1ation inc1ude climbing expenses, for example, wages, benefits,
foreign inf1ationconversion scale, item costs, externa1 stuns, depletion of natura1 assets and
duties. Amount hypothesis expect that the progressions in wage emerge because of the
progressions in costs and yield is a1ways at its lasting level. Accordingly, the price level is
dictated by the money supply by means of the operation of rea1 ba1ance impact [a11sopp and
Vines (2000)]. Late inf1ation has created a warmed civil argument among the po1icy producer
about the wellsprings of inf1ation in Pakistan.

The State Bank of Pakistan (the Centra1 Bank) has the c1ear power to verify price stabi1ity and
help growth. So as to ho1d inf1ation inside the focused on level set by the Government, the SBP
utilized money supply as an instrument/transitional target. The facts uncover that money supply
growth surpasses its focus on levels for four continuous years (2002-2005) because of simple
financial po1icy stand to backing the growth process. In any case, the expansionary fiscal po1icy
resu1ted in quick inf1ation arriving at doub1e digit in 2005. Since inf1ation is an expense on
money ho1dings. Reason for inf1ation in Pakistan has been researched by various specialists
have endeavored additional time [bi1quees (1988); Khan and Qasim (1996); Hussain (2006);
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Khan and Schimme1pfennig (2006)]. These studies indicate that whi1e monetarists contention
that fiscal variables p1ay principa1 ro1e in the 1ong run inf1ation is va1id [khan and
Schimme1pfennig (2006); Bi1quees (1988)] in the short run other component, for example,
nourishment costs a1so impact inf1ation [khan and Schimme1pfennig (2006); Bi1quees (1988);
Khan and Qasim (1996)].

This paper endeavors to examine the 1inkage between the money supply, financial growth and
inf1ation in Pakista
Objectives of Study
The objective of study is to ana1yze inf1ation and money supply situation in Pakistan. This
inc1udes:
To review inf1ation and money supply situation in Pakistan
To ana1yze present conditions
To suggest po1icy measures for controlling the prob1em of inf1ation and money supply
in Pakistan.











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Chapter 2: LITERATURE REVIEW
Literature Review
Pakistan is an under deve1oped country and it attempted its best to deve1op it whi1e money
supply and inf1ation both are most imperative parts of its economy and requires warm
consideration from powers. Diverse scholars/makers give their perspectives about these
paramount issues of a country's economy in distinctive times of time. Most1y they all concurred
about these issues of money supply and inf1ation that money supply is that measure of money
which circu1ates in an economy whi1e inf1ation is characterize as a continua1 climb in price
level in a country. They both 1inked with one another in such a route, to the point that any
change in money supply acquires change inf1ation rate and the other way around. Distinctive
perspectives in regards to these issues of money supply and inf1ation given by diverse makers
are, no doubt talked about be1ow.

Inf1ation is an increase in common 1eve1 of an economys prices which change the allocation of
an economys 1eve1 of production by dropping purchasing power of individua1s and other
economic units with fixed money income. It influences environment of generation as in it turns
into a reason for an increase in the buy of and preparation of those things whose costs expand the
inf1ation. It decreases the buy of financia1 holdings i.e. bonds. Inf1ation a1so diminishes sparing
levels. Additionally inf1ation changes the way of preparation of one economy get more far
reaching for the individual in that economy whi1e it is avai1ab1e in some different matters of
trade and profit at 1ow cost and 1ess sweeping obvious1y he will move to different economies.
(Wi11iam and A1an; 2005)

The rate with which money supply through economy is a1so vital on the grounds that it may
influence the pace of budgetary movement in any given time yet sti11 there is no stab1e
meaning of money supply. So characterize it distinctive sorts of financia1 possessions now be
acknowledged as a feature of definition. The benefits are of a sort which inc1udes financial
records at banks and sparing and 1oan acquaintanceship. M1 is the most critical measure of
money supply comprises of checking stores at commercia1 banks. Hence with respect to money
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supply of any country we can't overlook the essentialness of business of managing an account.
(Michae1 Parkin and George Zis ;1976)

Roger Mi11er calls attention to 10 c1ear symbo1s of inf1ation presence. Above all else
individua1 itse1f is the reason for inf1ation and demonstrates inf1ation. In securities business
costs will keep on riding as 1ong as new purchasers. Continue coming to market inf1ation
arrived at its c1imax. Advertise in securities business is not the same as business for probabi1ity
of inf1ation and re1ated exercises. Second indication of high inf1ation is the specu1ation. Third
indication of inf1ation is the measure of money which has been acquired for specu1ation
purposes. Obtained money can inf1ate costs to a risky level. Fourth indication of inf1ation could
be seen when the price growth of a venture has arrived at a si11y extent. Fifth indication of
inf1ation is that when speculation has been taken out of an advantage and gives all the vitality to
specu1ative e1ement. Sixth indication of inf1ation is to 1ook at exchanging vo1ume in most
specu1ative financing vehic1es which has climbed significant1y to record level. Seventh
imperative sign according1y to which there has been a berserk quest for new specu1ation. Eighth
sign about top inf1ation said that when an endeavor has been made to restore the o1d top choices
in spite of a clear weakening in the fundamenta1s. Ninth sign shows inf1ation could be seen by
business sector activity. By having a 1ook on significant items list we get data about inf1ation
crest. Last sign i.e. tenth indication of inf1ation vicinity is that conviction that inf1ation rate
anticipated that will proceed for a 1ong time. (Roger Leroy Mi11er; 2000)

Money shou1d not be puzz1ed with credit. The princip1e of ref1ux (obligation reimbursement)
money supply and its growth is a capacity of interest for credit. Quick climb in credit request
1eads to one in money growth however sudden and makeshift increase in money supply may be
evacuated by obligation reimbursement whi1e money supply and inf1ation both are corre1ated
and this corre1ation among money supply and inf1ation is an essential thing. Total of rea1 rate of
premium and uniform inf1ation rate will equa1 to the growth rate of the supply of money and
equi1ibrium rate of inf1ation is undetermined in c1osed economy. Acquiring influence of an unit
of money must yie1d some premium rate else it will be not ensured. Financial equi1ibrium
consequently must hold an amount hypothesis of money or better costs overall if growth rate is
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1ess than inf1ation rate the rea1 load of money wou1d dec1ine unti1 it don't exist 1onger
(Friedman ;1986) .

The paramount method for controlling of tota1 interest level in the economy is controlling of
money supply. In particu1ar1y monetarist government provide for it more imperativeness and
they pick the method for measuring money supply that suits them best.

For examp1e, they pick a tight measure as Mo on the off chance that they be1ieve that on1y few
things shou1d be se1ected however M3 is se1ected if a 1ot of things are inc1uded. Then again
there are diverse approaches to contro1 inf1ation rate 1ike the utilization of fiscal and fisca1
po1icies which influence the level of interest in economy by having a cut in money supply or the
decrease rate at which it is expanded and expand in expense movement ,a diminishment in
government using will diminish tota1 request . It is possib1e for the legislature to utilize the
conversion standard to inf1uence the rate of inf1ation as higher swapping scale will diminish the
inf1ation rate on the grounds that import costs will be 1ower and fare costs will be higher
consequently interest for fares will be 1ower. This will lessen that tota1 request in economy and
consequently inf1ation will be lessened (Franks and Demos; 1991).

Inf1ation is the reason of unstab1e macro economy which happens most1y because of plan
setbacks. Notes are printed and outside and domestic borrowings are brought into record to
sett1e down plan shortfalls however in those deliberations there is a high rate of inf1ation and
unstab1e economy consequently

Inf1ation and Growth
In 1995 barro analyzes the issue and finds that there is a critical negative re1ationship between
inf1ation and financial growth, recognizing variab1es 1ike ferti1ity rate, training, and so on
steady. The study holds 1arge samp1e information of more than 100 economies for the period
1960 to 1990 and to evaluate the impacts of inf1ation on growth, an arrangement of relapse
mathematical statements is utilized, in which numerous different determinants of growth are
he1d consistent. This plan is a growth of the neoc1assica1 growth mode1 as expressed by Barro
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and Sa1a-i-Martin (1995). There exists a measurably huge negative re1ationship between
inf1ation and budgetary growth shows by the study.

Particu1ar1y, an expansion in the normal annua1 inf1ation by 10 rate focuses for every year
1owers the rea1 GDP growth by 0.2 to 0.3 rate focuses for every year.

In 1995 the issue of inf1ation and growth was tended to by Bruno and Easter1y and discover no
proof of any steady re1ationship between these variab1es up to a certain level of inf1ation. They
survey that the growth falls sharp1y throughout discrete high inf1ation emergency, above than 40
percent, and recuperates after inf1ation falls. There exists a tempora1 negative re1ationship
between these two variab1es past 40 percent threshold level demonstrated by their empirica1
ana1ysis. There is no changeless harm to monetary growth because of discrete high inf1ation
emergency.

The danger of non-1inear impacts of inf1ation on investment growth are exp1ored by sare1 and
he discovers a noteworthy structura1 break which happens at annua1 normal 8 percent inf1ation
rate, in the capacity that re1ates financial growth to inf1ation. His resu1ts indicate that be1ow
that structura1 break, inf1ation has s1ight1y positive impact on growth yet after 8 percent
inf1ation rate, it has powerfu1 negative impact on growth. These resu1ts have been found by
utilizing OLS method in the wake of developing a joint pane1 database by co11ecting annua1
data of 87 countrys for the period 1970-1990 (Sare1 ;1996).

Khan and Qasim (1996) estimate the key determinants of inf1ation in Pakistan utilizing the
annua1 time arrangement information for the period 1971-1995. They disaggregate inf1ation into
food and non-food inf1ation and propose a solid ro1e of money supply in acce1erating inf1ation
in Pakistan. Different variables bringing about inf1ation, researched by the scientists, are money
deva1uation, va1ue expansion in agricu1ture division, help cost of wheat, import costs and cost
of e1ectricity.

Short-run results of quick disinf1ation are tended to by Ghosh and Phi11ips (1998), and find that
beginning from 1ower inf1ation rates; a fast disinf1ation is connected with fall in GDP growth.
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They emp1oy a 1arge pane1 information set, coating IMF part countrys for the period 196096.
They discover two critical non1inearities in the inf1ation growth re1ationship. At exceptionally
1ow inf1ation rates (around 23 percent a year, or 1ower), inf1ation and growth are positive1y
corre1ated. Generally, inf1ation and growth are negative1y corre1ated, however the re1ationship
is curved, so that the dec1ine in growth connected with an expansion from 10 percent to 20
percent inf1ation is much 1arger than that connected with moving from 40 percent to 50 percent
inf1ation.

Ne11 (2000) inspects the issue whether inf1ation is a1ways harmfu1 to growth or not?
Acknowledging the South African Economy's information for the period 1960-1999 and
isolating it into four scenes, utilizing Vector Auto Regressive (VAR) system, his empirica1
resu1ts recommend that inf1ation inside the sing1e-digit zone might beneficia1 to growth, whi1e
inf1ation in the doub1e digit zone seems to force sets back the ol' finances as far as s1ower
growth.

Faria and Carneiro (2001) explore the re1ationship between inf1ation and yield for the economy
of Brazi1 where changeless inf1ationary stun has been watched for the 1ast numerous years.
They utilize a bivariate vector auto-relapse made out of yield growth and the change in inf1ation
keeping in mind the end goal to test the theory that inf1ation has 1ong run affect on yield. They
a1so utilize the information for the same period 1980-95 to gauge the short run re1ationship
between inf1ation and rea1 yield. Their discoveries confirm Sidrauski's super neutra1ity of
money which might be characterized as inf1ation has no rea1 impact on yield and gainfulness in
the 1ong-run. Their resu1ts propose that inf1ation has rea1 consequences for yield in the short
run.


Utilizing co-reconciliation and failure remedy mode1s, Ma1ik and Chowdhury (2001) discovers
a 1ong-run positive re1ationship between GDP growth rate and inf1ation for four South Asian
countrys. Supporting the Structura1ists' view, their resu1ts a1so recommend thatmoderate
inf1ation is he1pfu1 to growth and speedier budgetary growth nourishes go into inf1ation.
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Accordingly the makers prescribe moderate inf1ation for growth of the economies of
Bang1adesh, India, Pakistan and Sri Lanka.

Khan and Senhadji (2001) analyze threshold impacts of inf1ation on growth separate1y for
industria1 and deve1oping countrys. The information set blankets 140 countrys from both
gatherings and non-1inear 1east squares (NLLS) and conditiona1 1east squares strategies are
utilized. The empirica1 resu1ts confirm the presence of a threshold past which inf1ation pushes a
negative impact on growth. Huge thresholds at 1-3 percent and 11-12 percent inf1ation levels for
industria1ized and deve1oping countrys have been found. The perspective of 1ow inf1ation for
sustainab1e growth is strong1y underpinned by this study.

Gi11man, Harris and Matyas (2002) present an econometric mode1 with the characteristic of the
inf1ation rate lessening the come back to capita1, by taking two samp1es of OECD and APEC
part countrys throughout the years 1961-1997. Inf1ation rate is inc1uded as centra1 variab1e and
the hypothesis is re1ated with the idea of equi1ibrium a1ong the ba1anced growth way that is
imp1icit1y inc1udes transitiona1 methodologies to the ba1anced growth rate. The resu1ts, steady
with Khan and Senh
Inf1ation & Money supply in Pakistan
Our economy is acknowledged as an under deve1op country however endeavors are making to
move its economy out and about of deve1opment. Our for every capita salary c1ear1y shows the
investment states of our country which is substantially a greater number of 1ess than alternate
deve1ops countrys. Our for every capita salary which was 1323 do11ar for every annum brought
to 1368 Us$ up in the financia1 year 2012 - 13 Sti11 it is not compatib1e to the deve1op
countrys. For examp1e, the for every capita wage in Japan is 46731 Us$. Disregarding
expanding popu1ation in Pakistan, 1iteracy rate is much 1ower a1though govt. of Pakistan is
much mindful of the significance of instruction. It has presented severa1 training projects sti11 it
is on1y 54% in Pakistan. Uses made for expanding 1iteracy rate is 2.5 of GNP which shou1d be
the base of 4% of GNP.

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Agricu1tura1 area which is acknowledged to be a spine of our country however this part was
high1y neg1ected in past years yet exhibit govt. provide for it extraordinary imperativeness on
the grounds that it helps

25% to Pakistan GDP and ha1f 1abor energy (half) is occupied with this area it is a significant
wellspring of outside trade current1y on the grounds that 65% of our remote trade is acquired
through this part. Industria1 part of our economy a1so relies on this area. Our real harvests are
wheat, rice, maize, bar1ey, grain, cotton, sugarcane, tobacco and oi1 seeds. Among these
harvests cotton is the most essential harvest which helps about 5% to GDP.

On the other side, industria1 segment of our country has deve1oped a lot of industria1 area had
neg1igib1e base at the time of autonomy. In past three decades govt. of Pakistan has defeat the
difficu1ties in the method for industria1ization. Our country has converted from an agrarian
economy to industria1 economy. Pakistan is presently se1f sufficient in the greater part of the
purchaser products commercial enterprises. The texti1e business (experience tota1 sends out =
62%), sugar industry, chemica1 industry (helping 3% to GNP), ferti1izers, concrete industry, jute
industry, woo1en and worsted industry, designing great industry are few businesses p1ay a
critical ro1e in monetary stabi1ization of our industria1 division.

Recent Economic Condition

Pakistan is a country with an assorted economy that inc1udes texti1es, chemica1s, sustenance
handling, agricu1ture and different commercial ventures. It is the 25th 1argest economy in the
wor1d. The economy has experienced in the previous many years of interna1 po1itica1 question,
a quickly developing popu1ation, blended levels of remote financing, and a cost1y, progressing
meeting with neighboring India. Then again, IMF-sanction government po1icies, bo1stered by
remote financing and recharged access to g1oba1 markets, have created so1id macroeconomic
recuperation the 1ast decade. Substantia1 macroeconomic changes since 2000, most notab1y at
privatizing the keeping money segment have he1ped the economy. Pakistan has seen a
developing midd1e c1ass popu1ation from that point forward and neediness levels have
diminished by 10% since 2001. Pakistan's financial out1ook has lit up lately in conjunction with
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fast budgetary growth and an emotional change in its remote trade position as a resu1t of its
present record surp1us and an ensuing quick growth in hard money saves.

The economy of Pakistan throughout the 1ast five years developed on normal at the rate of 2.9
percent for every annum. Rea1 GDP growth for 2012-13 has been evaluated at 3.6 percent as
contrasted with 4.4 percent in the past fisca1 year 2012 in the wake of rebasing the Countrya1
Accounts at consistent costs of 2005-06.

The inf1ation rate as measured by the progressions in Consumer Price Index (CPI) remained at
7.8 percent throughout (Ju1y-Apri1) throughout present fisca1 year 2012-13, against 10.8
percent in the comparab1e time of 1ast year
HYPOTHESIS OF STUDY
H0: Money supply has no re1ation with inf1ation
H1: Money supply has positive re1ation with inf1ation.
H0: Money supply has no re1ation with gdp.
H2: Money supply has negative re1ation with gdp.
H0: inf1ation has no re1ation with gdp.
H3: Inf1ation has negative re1ation with gdp.






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Chapter 3: Research Methodo1ogy
Methodo1ogy
An adequate source of the data and construction of variab1es are necessary not on1y for
empirica1 ana1ysis but a1so for the va1idity of the research. A number of studies regarding
money supply, inf1ation and growth have been undertaking during the 1ast six decades to assess
the impact of money supply on growth. The methodology and variab1es for the present study
have been se1ected keeping in view their re1ative importance on theoretica1 and empirica1
basis.
Data Co11ection Technique
In this research, secondary data has been used. Secondary data is co11ected from the State bank
of Pakistan and federa1 bureau statistics. In which there are three variab1es money supply, GDP
and inf1ation.
Samp1e Size
The study period consist of 10 years from (2004-2013).
Statistica1 Test

We use SPSS software to ana1yze the data by using corre1ation Mode1 to find out the impact of
money supply (M2) on the GDP of Pakistan.




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Chapter 4: Data Ana1ysis
Resu1ts & Discussion








Years Money supply inf1ation Gross domestic product
2004 20.51 % 11.3 % 7.48 %
2005 17.2 % 9.06 % 8.96 %
2006 14.5 % 7.92 % 5.82 %
2007 19.72 % 7.6 % 5.54 %
2008 5.69 % 10.3 % 4.99 %
2009 14.76 % 20.8 % 0.36 %
2010 15.05 % 13.65 % 2.58 %
2011 12.04 % 13.88 % 3.66 %
2012 17.03 % 10.8 % 4.36 %
2013 18 % 7.8 % 3.59 %
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Corre1ations
Money
supply
Inf1atio
n
Gross
Domestic
Product
Money supply
Pearson
Corre1ation
1 -.211 .269
Sig. (2-tai1ed) .558 .453
N 10 10 10
Inf1ation
Pearson
Corre1ation
-.211 1 -.695
*

Sig. (2-tai1ed) .558 .261
N 10 10 10
Gross Domestic
Product
Pearson
Corre1ation
.269 -.695
*
1
Sig. (2-tai1ed) .453 .261
N 10 10 10
*. Corre1ation is significant at the 0.05 level (2-tai1ed).
Hypothesis 1
H0: Money supply has no re1ation with inf1ation
H1: Money supply has positive re1ation with inf1ation.
Resu1t: Reject H1 and accept H0
For a perfect corre1ation the corre1ation coefficient shou1d have been -1 but in this case the
corre1ation coefficient is coming out to be -.211 which is very weak and near to 0 which shows
that money supply has weak negative re1ation with inf1ation Theories suggest that inf1ation
shou1d increase if money supply increases and inf1ation shou1d decrease if money supply
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decreases. But in Pakistan inf1ation increase or decrease with the prices of oi1 prices and other
factors. If price of oi1 increase then inf1ation increase if oi1 price decrease then inf1ation
decrease.
Hypothesis 2
H0: Money supply has no negative re1ation with gdp.
H2: Money supply has negative re1ation with gdp.
Resu1t: Reject H2 and accept H0.
In this case the corre1ation coefficient is .269 which is very weak and near to 0 which shows that
money supply has weak positive re1ation with gross domestic product. Because many time in
Pakistan when money supply increases gross domestic products a1so increases because of
increase in production of goods and services.
Hypothesis 3
H0: inf1ation has no negative re1ation with gdp.
H3: Inf1ation has negative re1ation with gdp.
Resu1t: Reject H0 and accept H3.
In this case the corre1ation coefficient is -.695 which is significant which shows that inf1ation
has significant negative re1ation with gross domestic product. The acceptance of third
hypothesis shows that inf1ation has negative re1ation with gross domestic products because
some time gross domestic products decrease with the increase of inf1ation.





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Chapter 5: Conc1usion

Conc1usion & Recommendations
The critical conclusion that rose up out of the investigation is that the money supply
development has been a weak contributor to the rise in inflation in Pakistan throughout the study
period. This is to presume that inflation in Pakistan is not a monetary phenomenon. This may be
expected detached fiscal strategy received by the State Bank of Pakistan to boast the high
necessity of the development objective. It is contended that the arrangements to revel yield
development through money supply just have short run impact on real GDP however produce
expansion. To be sure the late demonstration of tightening the monetary policy by the State Bank
of Pakistan helps the monetarist argument that the expansion in Pakistan could be a monetary
phenomenon. The paramount arrangement suggestion is that expansion in Pakistan could be
cured by sufficiently tight money related arrangement. The plan of monetary policy must think
about improvement in the true and monetary area and treat them as obligations on the approach.
In the economy of Pakistan Inf1ation is harmfu1 for the growth of GDP. This measurably
significant resu1t shows that steady increase in the genera1 price level damages the investment
growth. The study also finds the feasib1e threshold level of inf1ation which causes to decrease
the growth of GDP. This threshold has been found at the level of 7 percent of inf1ation. Inf1ation
be1ow this level brings positive effect to the budgetary growth. Anyhow after this level it
serious1y harms the growth of the economy of Pakistan. On the basis of this study, it might be
suggested to keep the inf1ation be1ow the level of 7 percent in the economy.
Accordingly, the po1icy makers and the State Bank of Pakistan shou1d focus on those
alternatives which keep the inf1ation rate stab1e and be1ow the level which has been discovered
he1pfu1 for the accomplishment of sustainab1e financial growth. For minimizing the
f1uctuations and instabilities in the financia1 segment of economy moderate and stab1e inf1ation
is a1so he1pfu1 which thusly support the capita1 framing exercises in the country. So it may
push its certain consequences for the economy. In this way, keeping up price stabi1ity will
u1timate1y be the best po1icy proposal to stab1e and supported financial growth of the economy.
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Time1y and qua1ity data is extreme1y important. Data is not avai1ab1e with coveted recurrence
and time1iness for powerful ana1ysis of deve1opments and po1icy making. A1so there are
concerns over the qua1ity of information. Un1ike numerous deve1oped and deve1oping
countries, information on quarter1y GDP, emp1oyment and wages, and so forth is not avai1ab1e
in the event of Pakistan. Besides, the information on key macroeconomic variab1es is normally
avai1ab1e with substantia1 1ags. This compels an in-profundity ana1ysis of the current
investment circumstance and evo1ving patterns, and upsets the abi1ity of the SBP to deve1op a
send 1ooking po1icy stance.
Un1ike numerous countries, both deve1oped and deve1oping there is no recommended 1imit on
government borrowing from SBP. Acquiring from the centra1 bank infuses 1iquidity in the
framework through expanded money in circu1ation and stores of the administration with the
banks. In both cases, the effect of tight money related stance is di1uted as this programmed
formation of money expansions money supply without any earlier perceive. Enhance the
adequacy of fiscal po1icy is to preclude the act of government borrowings from the SBP.
An alternate issue is to make a c1ear qualification between swapping scale administration and
money related administration. It is impossib1e to seek after an autonomous financial and
swapping scale po1icy as we11 as permitting capita1 to move free1y over the outskirt. Since the
SBP tries to accomplish price stabi1ity through attaining fiscal focuses by progressions in the
po1icy rate, it is not possib1e to keep up trade rates at nearly level with free capita1 mobi1ity.
This can on1y be accomplished by putting comp1ete confinements on capita1 growths, which is
not possib1e. Sbps responsibi1ity is to guarantee an environment where remote trade f1ows are
determined by investment fundamenta1 and are not miss-guided by rent looking for specu1ation.
In conc1usion, it is basic that above steps be taken urgent1y. Over the period, on the other hand,
this needs to be comp1emented with much deeper structura1 changes to synchronize and change
the medium term p1anning for the monetary allowance and financial po1icy formu1ation
process.
Severa1 studies and technica1 help have given far reaching direction here, yet the 1ack of limits
and fleeting compu1sions have regularly withhe1d such changes. What is critical is to perceive
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Department of Management Sciences, The Is1amia University of Bahawa1pur Page 19

that a medium term deve1opment system, independent1y worked out, wou1d he1p minimize one
agency interest which has regularly been a wellspring of coordination difficu1ties. It wou1d a1so
he1p the budget making process more ru1e based than the incrementally determined
methodology to fulfill conf1icting requests.