The Drivers of Inflation, Disinflationary Monetary Policy and Public Debt in Pakistan

By using extended open economy Phillips curve framework, this paper has estimated the impact of monetary policy rate and public debt on inflation in Pakistan for the period 1983-2024. The explanatory variables included output gap, exchange rate, global inflation, monetary policy rate and public debt. The study has applied autoregressive distributed lag (ARDL) approach of cointegration and error correction model. As compared to excess domestic demand, exchange rate and foreign inflation play dominant role in determining inflation indicating weakening of traditional Phillips curve relationship. Further, the results indicated effectiveness of monetary policy rate in bringing inflation down and public debt also affects inflation negatively in Pakistan. The weakening of traditional Phillips curve relation due to dominance of external drivers of inflation, effectiveness of disinflationary monetary policy through demand and supply side, and complex consequences of rising indebtedness are important concerns for macroeconomic stability and sustainable inclusive growth in Pakistan.