A Quantitative Study on the Effects of Inflation, Exchange Rates, and Interest Rates on economic growth in Pakistan

Abstract

This study quantitatively investigates the effects of key macroeconomic variables inflation, exchange rates, and interest rates on economic growth in Pakistan. Utilizing time series data spanning 37 years from 1980 to 2017, sourced from the World Bank and the State Bank of Pakistan, the research employs an Ordinary Least Squares (OLS) regression model to analyze the relationships. The regression results indicate that the exchange rate has a strong, positive, and statistically significant impact on GDP growth, supporting the export-led growth hypothesis. Conversely, the interest rate demonstrates a significant negative relationship with economic growth, consistent with established macroeconomic theory. While inflation exhibited a negative coefficient, its direct impact was not found to be statistically significant within the scope of this model. The overall model is statistically significant, explaining approximately 35% of the variation in GDP growth. These findings underscore the critical importance of exchange rate and interest rate policies as significant levers for influencing economic performance in Pakistan. The study concludes that fostering sustainable economic growth requires the prudent and coordinated management of these macroeconomic variables.