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INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS
JUNE 2011
VOL 3, NO 2
5. Conclusion
Inflation is an important factor which is consistently affecting the economy. The study can
play a role of guideline towards the policy formulation for controlling inflation through
healthy monetary policy. This is the reason that many empirical studies have been
conducted to study its behavior to find out its root causes. The magnitude of change in
monetary policy and how it affects inflation, production and the relationship in between the
two: understanding of this phenomenon is deficient and it needs fresh inquiry (Qayyum,
2008).
The paper examines the impact of long-and short-run interest rates on inflation using time
series data (1961 -2010). These two interest rates have never been discussed together
before. ARDL is used for analysis. Cointegration exists among inflation, GDP, broad
money, bank rate and government bond rate. Inflation maintains significant relationship for
GDP, broad money, and bank rate but insignificant with government bond rate, which
implies that bank rate can be taken as one of important interest rate for inflation control.
CUSUM and CUSUMQ tests indicate stability and model fit of inflation. Granger causality
is used for the direction indication. Inflation is having unidirectional causality with GDP,
broad money and call money rate.
Finally, it is essential to mention that the outcomes of study ought to be taken as preface
and requires careful inference. Other variables with literature support must be included in
the model like exchange rate in search of real reasons. Yet, the study will be proved to be a
guide liner or a beacon house for future investigations being conducted on inflation in
context to Pakistan because the factor price rises is and will continue to influence an
economy.
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