Pakistan Economic and Social Review - Lahore


School of Economics, University of the Punjab, Lahore
ISSN (print): 1011-002X
ISSN (online): 2224-4174


  • December 31, 2020
Output gap; inflation; real interest rate gap; ARDL; unobserved component model

This study tries to empirically investigate two theoretical propositions for Pakistan's economy. The first one is the Keynesian output gap and its deterministic impact on the inflation and the second one is the impact of real interest rate gap on inflation proposed by Wicksell. ARDL approach has been utilized to identify the association among the specified series during selected sample period 1974 Q1 to 2017 Q4. The natural rate of interest and potential output are extracted using Uni-variate Unobserved Component Model. The results are suggestive of weak association between inflation and interest rate gap in the short run while strong association has been found in case of output gap. Further, a long run co-integration is found existent among the inflation, interest rate gap and output gap.


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International Institute of Islamic Economics, International Islamic University, Islamabad





International Institute of Islamic Economics, International Islamic University, Islamabad





Punjab Economic and Research Institute (PERI), Government of the Punjab, Lahore – Pakistan




Type: Articles
Volume: 58
Issue: 2
Language: English
Id: 605dbccb162fc
Pages 333 - 353
Published December 31, 2020


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Department of Economics, University of the Punjab, Lahore
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