Analyzing Macroeconomic Indicators in Pakistan: Insights from Unemployment, Inflation, and Interest Rates

Abstract

The study examines the intricate relationship between key macroeconomic indicators—unemployment rate, interest rate, and inflation rate in Pakistan spanning from 1974 to 2017. Through empirical analysis, the findings reveal various dynamics within these economic variables. One notable outcome is the absence of a significant trade-off between the unemployment rate and inflation rate. This suggests that changes in one variable do not consistently lead to predictable changes in the other, indicating a complex relationship between labor market conditions and price levels in Pakistan. However, the analysis does identify a trade-off in the short run between the interest rate and both inflation and unemployment rates. This implies that changes in interest rates can have an immediate impact on inflation and unemployment levels, highlighting the role of monetary policy in influencing economic conditions over shorter time horizons. Furthermore, the study sheds light on the factors influencing unemployment rates in Pakistan. Population growth is found to have a negative association with unemployment, suggesting that a growing population may contribute to higher employment opportunities. Conversely, external debt is positively correlated with unemployment, indicating potential constraints on job creation associated with indebtedness. Inflation dynamics are also explored, with money supply emerging as a significant determinant. This suggests that changes in the money supply, perhaps influenced by monetary policy decisions, have a direct impact on price levels in the economy. Additionally, the exchange rate and imports are found to exert a negative influence on inflation, indicating that factors affecting international trade can help mitigate inflationary pressures. Finally, the study highlights the role of interest rates in influencing domestic credit to the private sector, with a positive relationship observed. However, interest rates are negatively related to the exchange rate, indicating potential trade-offs in monetary policy decisions aimed at stimulating credit provision while maintaining exchange rate stability. The findings of the study provide valuable insights into the complex interactions between key macroeconomic variables in Pakistan, offering policymakers and researchers a deeper understanding of the country's economic dynamics and potential policy implications.