Impact of Money Supply and Domestic Credit on Economic Well-being: A Case of Pakistan

Abstract

The role of money supply along with domestic credit to the private sector is considered very critical in an economy. It helps to improve economic growth and economic well-being of the inhabitants of a country. The purpose of this study is to determine the impact of money supply and domestic credit to the private sector on the economic well-being of the inhabitants of Pakistan using annual data set over the period from 1981 to 2018. Autoregressive Distributive Lag (ARDL) with Bound Testing and Error Correction Model (ECM) have been applied to analyse the model for the long run as well as short run. The findings of the study indicate that both money supply and domestic credit have a statistically significant and positive impact on economic well-being measured by GDP per capita. On the other hand, inflation and real effective exchange rate, both have a significant and negative impact on economic well-being. The study suggests an easy monetary policy to promote domestic consumption and domestic credit since both are important determinants of economic growth and well-being.