Inflation and Remittances: A dynamic study in case of Pakistan using ARDL Approach

Abstract

This paper is an attempt to identify causes of inflation in Pakistan primarily to identify the effect of remittances on inflation because it is observed that in case of high inflation periods, the remittances also increases concerning their behavior and dependency. Recent literature on Pakistan’s economy highlighted that Pakistan is facing the problem of high inflation and data related to remittances also shows a major increase in remittances, signaling the connection between these two variables. For this purpose, yearly data is collected through various national and international reports for the period of 1971 to 2021. For empirical purpose, an Autoregressive Distributed Lag Model (ARDL) technique is applied to measure short run and long run effects of concerned variables. The study concluded that the effect of remittances is negligible in short run as well as in the long run. Whereas, the effect of exchange rate and oil prices are significant both in short run and in the long run. Similarly, the study identified money supply affect inflation only in the long run.