Macroeconomic Indicators and Market Dynamics: Unraveling the Link Between Poverty and Purchasing Power

Abstract

Poverty and purchasing power are fundamentally shaped by macroeconomic conditions, particularly in developing economies such as Pakistan where structural imbalances persist. The combined effect of exchange rates changes, inflationary pressures, and interest rates changes has not frequently been examined simultaneously in a combined long-run and short-run structure notwithstanding their importance. The current research attempts to fill this gap by examining the macroeconomic factors that explain the linkage between poverty and the economic erosion of purchasing power as a lens of understanding it. The movement of exchange rates, rate of inflation and change in interest rates are considered as key explanatory variables and poverty as dependent variable. The empirical investigation will adopt the Autoregressive Distributed Lag Spread (ARDL) to reflect equilibrium conditions and those of adjustment in the short run, which is based on macroeconomic theory and welfare economics. The findings indicate a strong and robust long-run cointegrarity relationship, and exchange rate depreciation and rising interest rates have negative associated impacts on the purchasing power, which contributes to poverty intensification, and inflation has a positive short-run pass-through impact that declines in the long run. The error correction term shows that there is a quick drift toward a long-run equilibrium emphasizing the sensitivity of poverty to macroeconomic shocks. Diagnostic testing makes model stability and reliability possible. The policy-relevant contribution that the study presents is the idea that poverty-reduction programs in Pakistan should consider including both macroeconomic stabilization instruments and selective welfare provision to protect purchasing power under economically turbulent situations.