ENIGMA OF INFLATION TARGETING POLICIES IN PAKISTAN

Abstract

Inflation targeting has been an effective strategy during the past few decades to curb inflation, stimulate economic growth, and check unemployment. This study focuses on the long-term relationship between interest rates and inflation to evaluate inflation targeting as a monetary framework in Pakistan by using annual time series data for the years 1980 to 2020 to explore problems with inflation targeting. In this study, inflation is the dependent variable, whereas the interest rate, domestic debt, indirect tax revenue, and political stability are independent variables. To assess the long-run co-integration analysis, the Johansen co-integration approach has been employed for the data analysis of the developed model. It is concluded from the findings of the co-integration analysis that interest rates, domestic debt, and political stability have a significant and negative impact on inflation, whereas the impact of indirect tax revenue on inflation is positive and significant, supporting the formulated hypothesis. The results suggest that the government and decision-makers may develop strategies to manage and control interest rates, effectively regulate domestic debt, and reform the tax system in order to limit inflation in the country. The most important factor in ensuring the country's economic stability is the preservation of political stability.