ANALYZING INTEREST RATE GAP AND OUTPUT GAP AS INDICATORS OF INFLATION A TEST OF KEYNESIAN AND WICKSELLIAN PROPOSITION FOR PAKISTAN

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 ha...

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Bibliographic Details
Published inPakistan economic and social review Vol. 58; no. 2; pp. 333 - 353
Main Authors Qayyum, Waqqas, Amin, Baber, Adil, Shahid
Format Journal Article
LanguageEnglish
Published Department of Economics, University of the Punjab 01.12.2020
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Summary: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.
ISSN:1011-002X
2224-4174