An Empirical Analysis of Export, Import, and Inflation: A Case of Pakistan

This article examines the association between inflation and exports & imports in perspective of the Pakistani economy. The researchers have taken month-to-month data of CPI (the indicator of inflation), imports and exports from July 2001 through June 2017. For the analysis purpose, researchers have employed error correction model to examine the short- run association amongst the variables; however, Johansen cointegration was used to investigate the long run association amongst the variables. The Granger causality approach has been applied to check the causal directionality between the pair of variables. Results of analysis exhibited that in a long run 1% increase in exports and imports cause 0.63% and 0.57% increase in the CPI (inflation) correspondingly. However, the coefficient of predictable error correlation signifies that approximately 1.18% deviance of inflation rate through the long run level of equilibrium has been adjusted every year. Whereas, the outcomes of variance decomposition analysis (VDA) demonstrated that exports employed the highest innovation influence on the CPI (inflation) amongst all three indicators in the overall arrangement of inflation. Lastly, the outcomes of Granger causality and Toda Yamamoto causality does not find evidence for the hypotheses that the monthly changes of export and import do not cause the monthly modification in inflation in case of Pakistani economy.