The Interrelationship between Money Supply, Inflation, Public Expenditure and Economic Growth

Abstract

This study examines the association between money supply, inflation, government expenditure, and economic growth in Pakistan from 1972 to 2015. “ARDL Bounds Testing Approach” for “Co-integration and ECM Technique” were applied to study the long and short run relationship among the above mentioned variables. “Granger Causality Test” was applied to find out the direction of causality. The results find a long run association between Economic Growth, Government Expenditure, and Inflation. The results of “ECM” show the short run relationship among the above mentioned variables; however, the speed of adjustment is slow which slightly less than 20% is. “Granger Causality” test reveals that “causality runs from Inflation to Economic Growth” while causality between Inflation and Government Expenditure. Inflation and Money Supply is bidirectional. It is concluded that both monetary and fiscal policies have an impact on economic growth.